TIPTREE INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x
Annual
Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2009
o
Transition
Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period
from
to
Commission File Number:
001-33549
Care Investment Trust
Inc.
(Exact name of Registrant as
specified in its charter)
| Maryland | 38-3754322 | |
|
(State or other jurisdiction of
incorporation or organization) |
(IRS Employer
Identification Number) |
505 Fifth Avenue,
6
th
Floor, New York, New York 10017
(Address of Registrant’s
principal executive offices)
(212) 771-0505
(Registrant’s telephone
number, including area code)
Securities Registered Pursuant to Section 12(b) of the
Act:
| Title of each class | Name of each exchange on which registered | |
| Common Stock | New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
o
No
x
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
o
No
x
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
x
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definition of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act (check one):
Large accelerated
filer
o
Accelerated
filer
x
Non-accelerated
filer
o
Smaller
reporting
company
o
.
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes
o
No
x
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to
the price at which the common equity was last sold, or the
average bid and asked price of such common equity, as of the
last day of the registrant’s most recently completed second
fiscal quarter: $65,704,642.
Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest
practicable date.
As of March 11, 2010, there were 20,224,548 shares,
par value $0.001, of the registrant’s common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Part III incorporates information from certain portions of
the Registrant’s definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days
after the fiscal year end of December 31, 2009.
2
Disclosure
Regarding Forward-Looking Statements
Care Investment Trust Inc. (all references to
“Care”, “the Company”, “we”,
“us”, and “our” mean Care Investment
Trust Inc. and its subsidiaries) makes
“forward-looking” statements in this
Form 10-K
that are subject to risks and uncertainties. Forward-looking
statements include all statements that do not relate solely to
historical or current facts and can be identified by the use of
words such as “may,” “will,”
“expect,” “believe,” “intend,”
“plan,” “estimate,” “continue,”
“should” and other comparable terms. These
forward-looking statements include information about possible or
assumed future results of our business and our financial
condition, liquidity, results of operations, plans and
objectives. They also include, among other things, statements
concerning anticipated revenue, income or loss, capital
expenditures, dividends, capital structure, or other financial
terms as well as statements regarding subjects that are
forward-looking by their nature, such as:
| • | our ability to complete the Tiptree transaction; | |
| • | if we do not complete the Tiptree transaction, our ability to sell one or more of our assets; | |
| • | if we do not complete the Tiptree transaction, our ability to conduct an orderly liquidation; | |
| • | if we do not complete the Tiptree transaction, our ability to make one or more special cash distributions; | |
| • | our business and financing strategy; | |
| • | our ability to acquire investments on attractive terms; | |
| • | our projected operating results; | |
| • | market trends; | |
| • | estimates relating to our future dividends; | |
| • | completion of any pending transactions; | |
| • | projected capital expenditures; and | |
| • | the impact of technology on our operations and business. |
The forward looking statements are based on our beliefs,
assumptions, and expectations of our future performance, taking
into account the information currently available to us. These
beliefs, assumptions, and expectations can change as a result of
many possible events or factors, not all of which are known to
us. If a change occurs, our business, financial condition,
liquidity, and results of operations may vary materially from
those expressed in our forward looking statements. You should
carefully consider this risk when you make a decision concerning
an investment in our securities, along with the following
factors, among others, that could cause actual results to vary
from our forward looking statements:
| • | the factors referenced in this Form 10-K, including those set forth under the section captioned “Risk Factors”; | |
| • | general volatility of the securities markets in which we invest and the market price of our common stock; | |
| • | uncertainty in obtaining stockholder approval, to the extent it is required, for a strategic alternative; | |
| • | changes in our business or investment strategy; | |
| • | changes in healthcare laws and regulations; | |
| • | availability, terms and deployment of capital; | |
| • | availability of qualified personnel; | |
| • | changes in our industry, interest rates, the debt securities markets, the general economy or the commercial finance and real estate markets specifically; |
3
| • | the degree and nature of our competition; | |
| • | the performance and financial condition of borrowers, operators and corporate customers; | |
| • | increased rates of default and/or decreased recovery rates on our investments; | |
| • | increased prepayments of the mortgages and other loans underlying our mortgage-backed or other asset-backed securities; | |
| • | changes in governmental regulations, tax rates and similar matters; | |
| • | legislative and regulatory changes (including changes to laws governing the taxation of REITs or the exemptions from registration as an investment company); | |
| • | the adequacy of our cash reserves and working capital; and | |
| • | the timing of cash flows, if any, from our investments. |
We are not obligated to publicly update or revise any forward
looking statements, whether as a result of new information,
future events, or otherwise.
| ITEM 1. | Business |
Overview
Care Investment Trust Inc. (all references to
“Care”, “the Company”, “we”,
“us”, and “our” means Care Investment
Trust Inc. and its subsidiaries) is an externally managed
real estate investment trust (“REIT”) formed to invest
in healthcare-related real estate and mortgage debt. We were
incorporated in Maryland in March 2007, and we completed our
initial public offering on June 22, 2007. As a REIT, we are
generally not subject to income taxes. To maintain our REIT
status, we are required to distribute annually as dividends at
least 90% of our REIT taxable income, as defined by the Internal
Revenue Code of 1986, as amended (the “Code”), to our
stockholders, among other requirements. If we fail to qualify as
a REIT in any taxable year, we would be subject to
U.S. federal income tax on our taxable income at regular
corporate tax rates.
We were originally positioned to make mortgage investments in
healthcare-related properties, and to invest in
healthcare-related real estate, through utilizing the
origination platform of our external manager, CIT Healthcare LLC
(“CIT Healthcare” or our “Manager”). We
acquired our initial portfolio of mortgage loan assets from our
Manager in exchange for cash proceeds from our initial public
offering and common stock. In response to dislocations in the
overall credit market, and in particular the securitized
financing markets, in late 2007, we redirected our focus to
place greater emphasis on healthcare-related real estate
investments. In 2008, we decided to hold our investment mortgage
loans for sale, fully shifting our strategy from investing in
mortgage loans to divesting of those loans and becoming an
equity REIT.
Our Manager is a healthcare finance company that offers a
full-spectrum of financing solutions and related strategic
advisory services to companies across the healthcare industry
throughout the United States. Our Manager was formed in 2004 and
is a wholly-owned subsidiary of CIT Group Inc.
(“CIT”), a leading middle market global commercial
finance company that provides financial and advisory services.
As of December 31, 2009, we maintained a diversified
investment portfolio consisting of $56.1 million in
unconsolidated joint ventures that own real estate,
$101.5 million invested in wholly owned real estate and
$25.3 million in 3 investments in mortgage loans that are
held at lower of cost or market (“LOCOM”). Our current
investments in healthcare real estate include medical office
buildings and assisted and independent living facilities and
Alzheimer facilities. Our loan portfolio is primarily composed
of first mortgages on skilled nursing facilities and mixed-use
facilities. In 2010, one borrower repaid one of the
Company’s mortgage loans and we sold one mortgage loan to a
third party.
On March 16, 2010, we announced the entry into a definitive
purchase and sale agreement with Tiptree Financial Partners,
L.P. under which we have agreed to sell a significant amount of
newly issued common stock to Tiptree at $9.00 per share. The
sale of common stock to Tiptree is expected to result in a
change in control of our company. Pursuant to the purchase and
sale agreement, we have agreed to launch a cash tender offer to
all of our
4
stockholders to purchase their common stock at $9.00 per share.
The discussion of the terms of the purchase and sale agreement
below is qualified in its entirety by the terms of the agreement
itself, which has been filed as Exhibit 10.1 to the
Company’s
Form 8-K
filed on March 16, 2010.
Real
Estate Equity Investments
Unconsolidated
Joint Ventures
Cambridge
Medical Office Building Portfolio
We own an 85% equity interest in eight limited liability
entities that own nine Class A medical office buildings
developed and managed by Cambridge Holdings, Inc.
(“Cambridge”) totaling approximately
767,000 square feet located in Texas (8) and Louisiana
(1). These facilities are situated on medical center campuses or
adjacent to acute care hospitals or ambulatory surgery centers,
and are affiliated with or tenanted by hospital systems and
doctor groups. Cambridge owns the remaining 15% interest in the
facilities and operates them under long-term management
contracts. Under the terms of the management agreement,
Cambridge acts as the manager and leasing agent of each medical
office building, subject to certain removal rights held by us.
The medical office building properties were 92% leased at
December 31, 2009.
The table below provides information with respect to the
Cambridge portfolio:
|
Weighted average rent per square foot
|
$24.97 | |
|
Average square foot per tenant
|
5,607 | |
|
Weighted average remaining lease term
|
6.40 years | |
|
Largest tenant as percentage of total rental square feet
|
9.59% |
Lease
Maturity Schedule:
|
% of
|
||||||||||||||||
|
Number of
|
Rental
|
|||||||||||||||
|
Year
|
tenants | Square Ft | Annual Rent | Sq Ft | ||||||||||||
|
2010
|
20 | 40,911 | $ | 945,438 | 5.79 | % | ||||||||||
|
2011
|
23 | 68,152 | 1,373,879 | 9.65 | % | |||||||||||
|
2012
|
17 | 63,119 | 1,413,491 | 8.94 | % | |||||||||||
|
2013
|
22 | 93,652 | 2,015,079 | 13.26 | % | |||||||||||
|
2014
|
11 | 55,340 | 1,119,007 | 7.83 | % | |||||||||||
|
2015
|
12 | 95,672 | 1,942,418 | 13.54 | % | |||||||||||
|
2016
|
11 | 58,659 | 1,266,502 | 8.30 | % | |||||||||||
|
2017
|
3 | 28,814 | 1,122,080 | 4.08 | % | |||||||||||
|
2018
|
3 | 55,444 | 1,498,062 | 7.85 | % | |||||||||||
|
2019
|
0 | — | — | — | ||||||||||||
|
Thereafter
|
4 | 146,660 | 4,945,036 | 20.76 | % | |||||||||||
| 100.0 | % | |||||||||||||||
We invested $72.4 million in cash and equity for our
interests in the Cambridge portfolio, which consisted of
$61.9 million of cash as well as commitments to issue
700,000 operating partnership units to Cambridge, subject to the
underlying properties achieving certain performance hurdles. The
operating partnership units are held in escrow and will be
released to Cambridge upon the achievement of certain
performance measures. Under the terms of our investment, we
receive an initial preferred minimum return of 8.0% on capital
invested with 2.0% per annum escalations until the earlier of
December 31, 2014 or when the entities have generated
sufficient cash to provide the preferred return without reliance
on the credit support for four of six consecutive quarters, with
total cash generated from the portfolio for the six quarters
sufficient to cover the preferred return over that period.
Thereafter, the Company’s preferred return converts to a
pari passu return with cash flow distributed 85% to us and 15%
to Cambridge.
5
The preferred return is guaranteed by three forms of credit
support, which are in place until the earlier of
(i) December 31, 2014 and (ii) cash flow from the
properties generates the required return for four of six
quarters. The forms of guarantee are (i) a claim on cash
flow attributable to Cambridge’s 15% stake, (ii) a
claim on the dividends payable on the operating partnership
units issued to Cambridge and (iii) our ability to cancel
operating partnership units issued at close (currently held in
escrow). If, our share of the cash flows in the properties are
not able to meet the required preferred return for the Company,
the Company will rely first on a claim on cash flow attributable
to Cambridge’s 15% stake. If that is not sufficient, then
the Company will rely on a claim on the dividends payable on the
operating partnership units issued to Cambridge. Finally, if
that is still not sufficient, the Company will rely on its
ability to cancel operating partnership units issued at the
closing of our investment (currently held in escrow).
Our 8% preferred return is based on our capital invested at the
closing of our investment in Cambridge on December 31,
2007. The obligation to issue (or, more specifically, to release
from escrow) the operating partnership units is accounted for as
a derivative obligation with a value tied both to our stock
price (as each operating partnership unit is convertible into
one share of our common stock) and to the performance of the
Cambridge portfolio in that we are able to cancel operating
partnership units during any quarter in which the operating cash
flow from our share of the portfolio does not generate our
preferred return, and our other credit support mechanisms (a
claim on the operating cash flow from Cambridge’s 15% stake
in the entities or a claim on the dividends payable on the
operating partnership units) do not enable us to meet our
preferred return. We are required to mark this obligation to
fair value each period. However, regardless of the fair value of
our obligation to issue these operating partnership units as of
any reporting period, our 8% preferred return remains fixed to
the initial capital that we invested to acquire our Cambridge
interests and escalates at a rate of 2.0% per annum.
Under the terms of our investment, Cambridge has the contractual
right to put its 15% interest in the properties to us in the
event we enter into a change in control transaction. Pursuant to
the terms of our joint venture with Cambridge, we provided
notice to Cambridge on May 7, 2009 that we had entered into
a term sheet with a third party for a transaction that would
result in a change in control of Care, which notice triggered
Cambridge’s contractual right to “put” its
interests in the joint venture to us at a price equal to the
then fair market value of such interests, as mutually agreed by
the parties, or, lacking such mutual agreement, at a price
determined through qualified third party appraisals. Cambridge
did not exercise its right to put its 15% joint venture interest
to us in connection with our entry into the term sheet with the
third party. As a result, we believe that Cambridge’s
contractual put right expired.
Senior
Management Concepts Senior Living Portfolio
We own interests in four independent and assisted living
facilities located in Utah and operated by Senior Management
Concepts, LLC (“SMC”), a privately held operator of
senior housing facilities. The four facilities contain 243
independent living units and 165 assisted living units, and each
facility is 100% private pay. Affiliates of SMC have entered
into
15-year
leases on the facilities that expire in 2022. These facilities
are 89% occupied as of December 31, 2009.
We paid $6.8 million in exchange for 100% of the preferred
equity interests and 10% of the common equity interests in the
joint venture. We will receive a preferred return of 15.0% on
invested capital and an additional common equity return payable
for up to ten years equal to 10.0% of projected free cash flow
after payment of debt service and the preferred return. Subject
to certain conditions being met, our preferred equity interest
is subject to redemption at par beginning on January 1,
2010. We retain an option to put our preferred equity interest
to our partner at par any time beginning on January 1,
2016. If our preferred equity interest is redeemed, we have the
right to put our common equity interests to our partner within
thirty days after notice at fair market value as determined by a
third-party appraiser.
Owned
Real Estate
Bickford
Senior Living Portfolio
We acquired 14 assisted living, independent living and Alzheimer
facilities from Eby Realty Group, LLC, an affiliate of Bickford
Senior Living Group LLC, (“Eby”) a privately owned
operator of senior housing facilities, in
6
two sale-leaseback transactions in June 2008 and September 2008.
We have leased back the twelve facilities we acquired in June
2008 and the two facilities we acquired in September 2008 to Eby
Realty Group through a master lease agreement for 15 years
and 14.75 years, respectively, with four
10-year
extension options. The portfolio, developed and managed by
Bickford, contains 643 units and is located in Illinois
(5), Indiana (1), Iowa (6) and Nebraska (2). The portfolio,
which is 100% private pay, was 89% occupied as of
December 31, 2009.
Under the terms of the master lease, the current minimum rent
due on the 14 Bickford properties is $9.4 million, or a
base lease rate of 8.46%. Base rent during the initial
15 year lease term increases at the rate of three percent
per year. We also receive additional base rent of 0.26% per
year, increasing at the rate of three percent per year during
the initial term of the master lease. The additional base rent
accrues during the first three years of the lease term and shall
be paid out in years four and five of the initial lease term.
The master lease is a “triple net” lease, and, as
such, the master lessee is responsible for all taxes, insurance,
utilities, maintenance and capital costs relating to the
facilities. The obligations of the master lessee under the
master lease are also secured by all assets of the master lessee
and the subtenant facility operators, and, pending achievement
of certain lease coverage ratios, by a second mortgage on
another Eby project and a pledge of minority interests in six
unrelated Eby projects.
The purchase price for these acquisitions was
$111.0 million, and Eby has the opportunity under an earn
out agreement to receive an additional $7.2 million based
on the performance of the properties and under certain other
conditions.
Loans
Held at the Lower of Cost or Market
(“LOCOM”)
Upon consummation of our initial public offering, our Manager,
through an affiliate, contributed a portfolio of
healthcare-related mortgage assets in exchange for
$204.3 million in cash and $78.8 million in shares of
Care common stock (the “Contribution Portfolio”).
Investments in loans amounted to $25.3 million at
December 31, 2009. We account for our investment in loans
in accordance with Accounting Standards Codification 948, which
codified the FASB’s
Accounting for Certain Mortgage
Banking Activities
(“ASC 948”). Under ASC 948,
loans expected to be held for the foreseeable future or to
maturity should be held at amortized cost, and all other loans
should be held at the lower of cost or market (LOCOM), measured
on an individual basis.
At December 31, 2008, in connection with our decision to
reposition ourselves from a mortgage REIT to a traditional
direct property ownership REIT (referred to as an equity REIT,
see Notes 2, 4, and 5 to the financial statements) and as a
result of existing market conditions, we transferred our
portfolio of mortgage loans to LOCOM because we are no longer
certain that we will hold the portfolio of loans either until
maturity or for the foreseeable future.
Until December 31, 2008, we held our loans until maturity,
and therefore the loans had been carried at amortized cost, net
of unamortized loan fees, acquisition and origination costs,
unless the loans were impaired. In connection with the transfer,
we recorded an initial valuation allowance of approximately
$29.3 million representing the difference between our
carrying amount of the loans and their estimated fair value at
December 31, 2008. At December 31, 2009, the valuation
allowance was reduced to $8.4 million representing the
difference between the carrying amounts and estimated fair value
of our three remaining loans.
Our investments include senior whole loans and participations
secured primarily by real estate in the form of pledges of
ownership interests, direct liens or other security interests.
The investments are in various geographic markets in the United
States. These investments are all variable rate at
December 31, 2009 and had a weighted average spread of
6.76% over one month LIBOR and have an average maturity of
approximately 1.0 year. The effective yield on the
portfolio was 6.99% for the year ended December 31, 2009.
One month LIBOR was 0.23% at
7
December 31, 2009. As of December 31, 2009, (except as
described in footnotes (b) and (c)) we held the following
loan investments (in thousands):
|
December 31, 2009
|
Location |
Cost
|
Interest
|
Maturity
|
||||||||||||
| Property Type(a) | City | State | Basis (000s) | Rate | Date | |||||||||||
|
SNF/ALF(d)(c)
|
Nacogdoches | Texas | 9,338 | L+3.15% | 10/02/11 | |||||||||||
|
SNF/Sr.Appts/ALF
|
Various | Texas/Louisiana | 14,226 | L+4.30% | 02/01/11 | |||||||||||
|
SNF(d)(b)
|
Various | Michigan | 10,178 | L+7.00% | 02/19/10 | |||||||||||
|
Investment in loans, gross
|
$ | 33,742 | ||||||||||||||
|
Valuation allowance
|
(8,417 | ) | ||||||||||||||
|
Loans held at LOCOM
|
$ | 25,325 | ||||||||||||||
| (a) | SNF refers to skilled nursing facilities; ALF refers to assisted living facilities; and Sr. Appts refers to senior living apartments. | |
| (b) | Loan repaid at maturity in February 2010 for approximately $10.0 million (See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources”). | |
| (c) | Loan sold to a third party in March 2010 for approximately $5.9 million of net realized proceeds (See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources”). | |
| (d) | The mortgages are subject to various interest rate floors ranging from 6.00% to 11.5%. |
Our mortgage portfolio (gross) at December 31, 2009 is
diversified by property type and U.S. geographic region as
follows (in millions of dollars):
|
December 31,
|
||||||||
| 2009 | ||||||||
|
Cost
|
% of
|
|||||||
| By Property Type | Basis | Portfolio | ||||||
|
Skilled Nursing
|
$ | 10.2 | 30.2 | % | ||||
|
Mixed-use
(1)
|
23.5 | 69.8 | % | |||||
|
Total
|
$ | 33.7 | 100.0 | % | ||||
|
December 31,
|
||||||||
| 2009 | ||||||||
|
Cost
|
% of
|
|||||||
| By U.S. Geographic Region | Basis | Portfolio | ||||||
|
Midwest
|
$ | 10.2 | 30.2 | % | ||||
|
South
|
23.5 | 69.8 | % | |||||
| $ | 33.7 | 100.0 | % | |||||
| (1) | Mixed-use facilities refer to properties that provide care to different segments of the elderly population based on their needs, such as Assisted Living with Skilled Nursing capabilities. |
As of December 31, 2009, our portfolio of three mortgages
was extended to five borrowers. Two of those three mortgage
loans were sold or repaid in 2010 as indicated in (b) and
(c), above. As of December 31, 2008, our portfolio of
eighteen mortgages was extended to fourteen borrowers with the
largest exposure to any single borrower at 20.9% of the carrying
value of the portfolio. The carrying value of three loans, each
to different borrowers with exposures of more than 10% of the
carrying value of the total portfolio, amounted to 54.9% of the
portfolio.
Our
Manager
CIT
Healthcare
Our Manager, CIT Healthcare, is a healthcare finance company
that offers a full spectrum of financing solutions and related
strategic advisory services to companies across the healthcare
industry throughout the United States. We believe that our
Manager effectively leverages its extensive knowledge and
understanding of the healthcare industry through its
client-centric and industry-focused model. Our Manager meets the
diverse commercial financing needs of U.S. healthcare
providers, including hospitals and health systems, outpatient
centers, skilled nursing facilities, assisted living facilities,
physician practices, home care and hospice companies, ambulatory
surgery centers, pharmaceutical and medical technology
companies, long-term care facilities, and vendors serving
healthcare providers. Our Manager’s leadership team has
extensive experience in addressing the capital requirements and
advisory service needs of the healthcare marketplace, allowing
it to offer a full suite of customized, flexible healthcare
financing solutions and services.
8
As of December 31, 2009, our Manager employed approximately
59 professionals with substantial experience and expertise in
origination, underwriting, structuring, portfolio management,
servicing, securitization, syndication and secondary market
transactions. Of these professionals, our Manager had
13 employees originating and sourcing investment
opportunities for our consideration. We believe our Manager is
one of the leading healthcare financiers in the country. As of
December 31, 2009, our Manager owned assets of
approximately $1.7 billion.
CIT
CIT (NYSE: CIT) is a bank holding company that provides
financial products and advisory services to more than one
million customers in over 50 countries across 30 industries. A
leader in middle market financing, CIT has more than
$60 billion in managed assets at December 31, 2009,
and provides financial solutions for more than half of the
Fortune 1000. A member of the Fortune 500, it maintains leading
positions in asset-based, cash flow and Small Business
Administration lending, equipment leasing, vendor financing and
factoring.
CIT announced on November 1, 2009 that it had commenced a
prepackaged plan of reorganization for CIT Group, Inc. and CIT
Group Funding Company of Delaware LLC under the
U.S. Bankruptcy Code. None of CIT’s operating
subsidiaries, including our Manager, were included in the CIT
bankruptcy filings. On December 8, 2009, CIT announced that
its reorganization plan had been confirmed and on
December 10, 2009 CIT emerged from bankruptcy.
At December 31, 2009, CIT, through our Manager and CIT Real
Estate Holdings Corporation (“CIT Holding”), owned
37.6% of our outstanding common stock.
The
Healthcare Industry
Healthcare is the single largest industry in the U.S. based
on Gross Domestic Product (“GDP”). According to the
National Health Expenditures report dated January 2010 by the
Centers for Medicare and Medicaid Services (“CMS”),
national health expenditures are projected to grow 5.7% to $2.5
trillion in 2009, and the healthcare industry is projected to
represent 17.3% of U.S. GDP in 2009. Over the projection
period of 2009 through 2019, the average compound annual growth
rate for national health expenditures is anticipated to be 6.1%,
with national health spending expected to reach $4.5 trillion
and comprise 19.3% of U.S. GDP by 2019.
Senior citizens are the largest consumers of healthcare
services. According to CMS, on a per capita basis, the
75-year
and
older segment of the population spends 76% more on healthcare
than the 65 to
74-year-old
segment and over 200% more than the population average.
According to the U.S. Census Bureau, the 65 and older
segment of the population is projected to increase by 76.6%
through 2030. The U.S. population 65 years and older
is growing in large part due to the coming of age of the
“baby boomer” generation, as well as advances in
medicine and technology that have increased the average life
expectancy of the population.
Delivery of healthcare services in the U.S. requires a
variety of physical plants, including hospitals, surgical
centers, skilled nursing facilities, independent and assisted
living facilities, medical office buildings, laboratories,
research facilities, among others, and healthcare providers
require real estate investors and financiers to grow their
businesses. Given the demographic trends for healthcare spending
and an aging population with an increased life expectancy, we
believe that the healthcare-related real estate market provides
attractive investment opportunities.
Origination
Opportunities from Portfolio Clients
Our investments are primarily sourced and originated by our
Manager’s origination team, which consisted of 13 members
as of December 31, 2009, and we participate in investments
in which our Manager and affiliates also participate. The
Company has adopted certain policies that are designed to
eliminate or minimize certain potential conflicts of interest
with our Manager, and our board of directors has established
investment guidelines. The conflict of interest policy with our
Manager includes the first right to invest, pari passu
co-investments, participations, pro-rata fee sharing and legal
services by CIT, among other provisions.
In soliciting and evaluating these opportunities, our Manager
has developed considerable institutional relationships within
the healthcare industry. In addition, our Manager services the
loans that it directly originates and monitors our portfolio to
generate new origination opportunities from existing assets.
9
Our
Facilities
The market for healthcare real estate is extensive and includes
real estate owned by a variety of healthcare operators. The
following describes the nature of the operations of our tenants
and borrowers:
Senior
Housing Facilities
Senior housing properties include independent living facilities,
assisted living facilities and continuing care retirement
communities, which cater to different segments of the elderly
population based upon their needs. Services provided by our
tenants in these facilities are primarily paid for by the
residents directly or through private insurance and are less
reliant on government reimbursement programs such as Medicaid
and Medicare.
| • | Independent Living Facilities, or ILFs. ILFs are designed to meet the needs of seniors who choose to live in an environment surrounded by their peers with services such as housekeeping, meals and activities. These residents generally do not need assistance with activities of daily living, including bathing, eating and dressing. However, residents have the option to contract for these services. | |
| • | Assisted Living Facilities, or ALFs.ALFs are licensed care facilities that provide personal care services, support and housing for those who need help with activities of daily living yet require limited medical care. The programs and services may include transportation, social activities, exercise and fitness programs, beauty or barber shop access, hobby and craft activities, community excursions, meals in a dining room setting and other activities sought by residents. These facilities are often in apartment-like buildings with private residences ranging from single rooms to large apartments. Certain ALFs may offer higher levels of personal assistance for residents with Alzheimer’s disease or other forms of dementia. Levels of personal assistance are based in part on local regulations. | |
| • | Continuing Care Retirement Communities, or CCRCs. CCRCs provide housing and health-related services under long-term contracts. This alternative is appealing to residents as it eliminates the need for relocating when health and medical needs change, thus allowing residents to “age in place.” Some CCRCs require a substantial entry fee or buy-in fee, and most also charge monthly maintenance fees in exchange for a living unit, meals and some health services. CCRCs typically require the individual to be in relatively good health and independent upon entry. |
Medical
Office Buildings
MOBs typically contain physicians’ offices and examination
rooms, and may also include pharmacies, hospital ancillary
service space and outpatient services such as diagnostic
centers, rehabilitation clinics and day-surgery operating rooms.
While these facilities are similar to commercial office
buildings, they require more plumbing, electrical and mechanical
systems to accommodate multiple exam rooms that may require
sinks in every room, brighter lights and special equipment such
as for dispensing medical gases.
Hospitals
Services provided in these facilities are paid for by private
sources, third-party payors (e.g., insurance and health
management organizations, or HMOs), or through the Medicare and
Medicaid programs.
| • | Acute Care Hospitals. Acute care hospitals offer a wide range of services such as fully-equipped operating and recovery rooms, obstetrics, radiology, intensive care, open heart surgery and coronary care, neurosurgery, neonatal intensive care, magnetic resonance imaging, nursing units, oncology, clinical laboratories, respiratory therapy, physical therapy, nuclear medicine, rehabilitation services and outpatient services. | |
| • | Long-Term Acute Care Hospitals. Long-term acute care hospitals provide care for patients with complex medical conditions that require longer stays and more intensive care, monitoring, or emergency back-up than that available in most skilled nursing-based programs. |
10
| • | Specialty Hospitals. Specialty hospitals are licensed as acute care hospitals, but focus on providing care in specific areas such as cardiac, orthopedic and women’s conditions, or specific procedures such as surgery, and are less likely to provide emergency services. | |
| • | Rehabilitation Hospitals. Rehabilitation hospitals provide inpatient and outpatient care for patients who have sustained traumatic injuries or illnesses, such as spinal cord injuries, strokes, head injuries, orthopedic problems, work-related disabilities and neurological diseases. |
Skilled
Nursing Facilities
Skilled Nursing Facilities, or SNFs, offer restorative,
rehabilitative and custodial nursing care for people not
requiring the more extensive and sophisticated treatment
available at hospitals. Ancillary revenues and revenue from
sub-acute
care services are derived from providing services to residents
beyond room and board and include occupational, physical,
speech, respiratory and intravenous therapy, wound care,
oncology treatment, brain injury care and orthopedic therapy, as
well as sales of pharmaceutical products and other services.
Certain skilled nursing facilities provide some of the foregoing
services on an out-patient basis. Skilled nursing services
provided by our tenants in these facilities are primarily paid
for either by private sources, or through the Medicare and
Medicaid programs.
Outpatient
Centers
Outpatient centers deliver healthcare services in dedicated
settings utilizing specialized staff to provide a more efficient
and comfortable experience to the patient than is available in a
traditional acute care hospital. Ambulatory surgery centers,
dialysis clinics, and oncology diagnostic and treatment centers
are examples of the type of outpatient facilities we intend to
target for investment.
Other
Healthcare Facilities
Other healthcare facilities may include physician group practice
clinic facilities, health and wellness centers, and facilities
used for other healthcare purposes, behavioral health, and
manufacturing facilities for medical devices.
Availability
of Documents and Other Information
Our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
and current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”) are available
free of charge on Care’s internet website,
www.carereit.com, as soon as reasonably practicable after such
information is electronically filed with, or furnished to, the
Securities and Exchange Commission (“SEC”). We also
make available on our web site our Code of Ethical Conduct that
applies to our directors and executive officers, as well as to
employees of our Manager when acting for, or on behalf of Care.
In the event that we make changes in, or provide waivers of, the
provisions of this Code of Ethical Conduct that the SEC requires
us to disclose, we intend to disclose these events on our
website. In addition, the SEC maintains an internet website that
contains reports, proxy and information statements and other
information related to registrants who file electronically with
the SEC at www.sec.gov. Access to this site is free of charge.
Healthcare
Regulation
Overview
The tenants and operators of our properties are typically
subject to extensive federal, state and local laws and
regulations including, but not limited to, laws and regulations
related to licensure, conduct of operations, ownership of
facilities, addition of facilities, services, prices for
services, billing for services, and the confidentiality and
security of health-related information. A significant expansion
of applicable federal, state or local laws and regulations,
proposed healthcare reform, new interpretations of existing laws
and regulations or changes in enforcement priorities could have
a material adverse effect on certain of our operators’
liquidity, financial condition and results of operations, which,
in turn, could adversely impact their ability to satisfy their
contractual obligations.
11
These regulations are wide-ranging and complex, and may vary or
overlap from jurisdiction to jurisdiction. Compliance with such
regulatory requirements, as interpreted and amended from time to
time, can increase operating costs and thereby adversely affect
the financial viability of our tenants’ and operators’
business. These laws authorize periodic inspections and
investigations, and identification of deficiencies that, if not
corrected, could result in sanctions that include suspension or
loss of licensure to operate and loss of rights to participate
in the Medicare and Medicaid programs. Regulatory agencies have
substantial powers to affect the actions of tenants and
operators of our properties if the agencies believe that there
is an imminent threat to patient welfare, and in some states
these powers can include assumption of interim control over
facilities through receiverships.
Medicare is a federal program that provides certain hospital,
nursing home and medical insurance benefits to persons over the
age of 65, certain persons with disabilities and persons with
end-stage renal disease. Medicare, however, only pays for
100 days of nursing home care per illness upon release from
a hospital. Medicaid is a medical assistance program jointly
funded by federal and state governments and administered by each
state pursuant to which benefits are available to certain
indigent patients. The majority of governmental funding for
nursing home care comes from the Medicaid program to the extent
that a patient has spent their assets down to a predetermined
level. Medicaid reimbursement rates, however, typically are less
than the amounts charged by the tenants of our properties. The
states have been afforded latitude in setting payment rates for
nursing home providers. Furthermore, federal legislation
restricts a skilled nursing facility operator’s ability to
withdraw from the Medicaid program by restricting the eviction
or transfer of Medicaid residents. For the last several years,
many states have announced actual or potential budget
shortfalls, a situation which will likely continue due to the
current economic crisis. As a result of such actual or
anticipated budget shortfalls, many states have implemented, are
implementing or considering implementing “freezes” or
cuts in Medicaid reimbursement rates paid to providers,
including skilled nursing providers. Changes to Medicaid
eligibility criteria are also possible thereby reducing the
number of beneficiaries eligible to have their medical care
reimbursed by government sources. Any decrease in reimbursement
rates could have a significant effect on a tenant’s
financial condition, and as a result, could adversely impact us.
The Medicare and Medicaid statutory framework is subject to
administrative rulings, interpretations and discretion that
affect the amount and timing of reimbursement made under
Medicare and Medicaid. The amounts of program payments received
by our operators and tenants can be changed from time to time,
and at any time, by legislative or regulatory actions and by
determinations by agents for the programs due to an economic
downturn or otherwise. Such changes may be applied retroactively
under certain circumstances. In addition, private payors,
including managed care payors, continually demand discounted fee
structures and the assumption by healthcare providers of all or
a portion of the financial risk. Efforts to impose greater
discounts and more stringent cost controls upon operators by
private payors are expected to intensify and continue. However,
private payors and managed care payors that provide insurance
coverage for nursing home care, assisted living or independent
living is extremely limited. The primary private source of
coverage for nursing home care and assisted living facilities is
long-term care insurance, which is costly and not widely held by
patients. We cannot assure you that adequate third-party
reimbursement levels will continue to be available for services
to be provided by the tenants and operators of our properties
which currently are being reimbursed by Medicare, Medicaid and
private payors. Significant limits on the scope of services
reimbursed and on reimbursement rates and fees could have a
material adverse effect on these tenants’ and
operators’ liquidity, financial condition and results of
operations, which could adversely affect their ability to make
rental payments under, and otherwise comply with the terms of,
their leases with us.
Changes in government regulations and reimbursement (due to the
economic downturn or otherwise), increased regulatory
enforcement activity and regulatory non-compliance by our
tenants and operators can all have a significant effect on their
operations and financial condition, and as a result, can
adversely impact us. Please see ITEM 1A. “
Risk
Factors
” for more information.
While different properties within our portfolio may be more or
less likely subject to certain types of regulation which in some
cases is specific to the type of facility (
e.g.
, the
regulation of continuing care retirement communities by state
Departments of Insurance), all healthcare facilities are
potentially subject to the full range of regulation and
enforcement described more fully below. We expect that the
healthcare industry will continue to face increased regulation
and pressure in the areas of fraud, waste and abuse, cost
control, healthcare management and provision of services, as
well as continuing cost control initiatives and reform efforts
generally. Each of these factors can lead to reduced or slower
growth in reimbursement for certain services provided by our
tenants and operators, as well as
12
reduced demand for certain of the services that they provide. In
addition, we believe healthcare services are increasingly being
provided on an outpatient basis or in the home, and hospitals
and other healthcare providers are increasingly facing the need
to provide greater services to uninsured patients, all of which
can also adversely affect the profitability of some of our
tenants and operators.
Fraud and
Abuse
There are extensive federal and state laws and regulations
prohibiting fraud and abuse in the healthcare industry, the
violation of which could result in significant criminal and
civil penalties that can materially affect the tenants and
operators of our properties. The federal laws include:
| • | The anti-kickback provisions of the federal Medicare and Medicaid programs, which prohibit, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe or rebate) directly or indirectly in return for or to induce the referral of an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under Medicare or Medicaid. | |
| • | The “Stark laws,” which prohibit, with limited exceptions, referrals by physicians of Medicare or Medicaid patients to providers of a broad range of designated healthcare services with which physicians (or their immediate family members) have ownership interests or certain other financial (compensation) arrangements. | |
| • | The False Claims Act, which prohibits any person from knowingly presenting false or fraudulent claims for payment to the federal government (including the Medicare and Medicaid programs). | |
| • | The Civil Monetary Penalties Law, which authorizes the Department of Health and Human Services to impose civil penalties administratively for fraudulent acts. | |
| • | The Health Insurance Portability and Accountability Act of 1996 (commonly referred to as “HIPAA”), which among other things, protects the privacy and security of individually identifiable health information by limiting its use and disclosure. |
Sanctions for violating these federal laws include criminal and
civil penalties that range from punitive sanctions, damage
assessments, monetary penalties, imprisonment, denial of
Medicare and Medicaid payments,
and/or
exclusion from the Medicare and Medicaid programs. These laws
also impose an affirmative duty on operators to ensure that they
do not employ or contract with persons excluded from the
Medicare and other government programs.
Many states have adopted or are considering legislative
proposals similar to the federal fraud and abuse and physician
self-referral laws, some of which extend beyond the Medicare and
Medicaid programs to prohibit the payment or receipt of
remuneration for the referral of patients and physician
self-referrals relating to a broader list of services
and/or
regardless of whether the service was reimbursed by Medicare or
Medicaid. Many states have also adopted or are considering
legislative proposals to increase patient protections, such as
criminal background checks and limiting the use and disclosure
of patient specific health information. These state laws also
impose criminal and civil penalties similar to the federal laws.
In addition, various states have established minimum staffing
requirements, or may establish minimum staffing requirements in
the future, for hospitals, nursing homes and other healthcare
facilities. The implementation of these staffing requirements in
some states is not contingent upon any additional appropriation
of state funds in any budget act or other statute. Our
tenants’ and operators’ ability to satisfy such
staffing requirements will depend upon their ability to attract
and retain qualified healthcare professionals. Failure to comply
with such minimum staffing requirements may result in the
imposition of fines or other sanctions. If states do not
appropriate sufficient additional funds (through Medicaid
program appropriations or otherwise) to pay for any additional
operating costs resulting from such minimum staffing
requirements, our tenants’ and operators’
profitability may be materially adversely affected.
Finally, the majority of states have enacted laws implementing
specific requirements in the event that the personal information
of a patient or resident is compromised. Although these
requirements vary from state to state,
13
notification of security breaches to the state Attorney General
and affected patients or residents is often required.
Notification may be costly and time consuming and a failure to
comply with these requirements may result in civil or criminal
penalties. To the extent to which our tenants own or maintain
personal information, they may be required to comply with the
state security breach laws which could increase operating costs
and decrease a tenant’s profitability.
In the ordinary course of their business, the tenants and
operators of our properties have been and are subject regularly
to inquiries, inspections, investigations and audits by federal
and state agencies that oversee these laws and regulations.
Skilled nursing facilities are licensed on an annual or
bi-annual basis and certified annually for participation in the
Medicare and Medicaid programs through various regulatory
agencies which determine compliance with federal, state and
local laws. Increased funding through recent federal and state
legislation has led to a dramatic increase in the number of
investigations and enforcement actions over the past several
years. Private enforcement of healthcare fraud also has
increased due in large part to amendments to the civil False
Claims Act in 1986 that were designed to encourage private
individuals to sue on behalf of the government. These
whistleblower suits by private individuals, known as
qui tam
suits, may be filed by almost anyone, including present and
former patients or nurses and other employees. HIPAA also
created a series of new healthcare-related crimes.
As federal and state budget pressures continue, federal and
state administrative agencies may also continue to escalate
investigation and enforcement efforts to eliminate waste and to
control fraud and abuse in governmental healthcare programs. A
violation of any of these federal and state fraud and abuse laws
and regulations could have a material adverse effect on our
tenants’ and operators’ liquidity, financial condition
and results of operations, which could affect adversely their
ability to make rental payments under, or otherwise comply with
the terms of, their leases with us.
Healthcare
Reform
Healthcare is the largest industry in the U.S. based on GDP
and continues to attract a great deal of legislative interest
and public attention. There are currently pending various
comprehensive reform initiatives that could transform the
healthcare system in the United States. The U.S. House of
Representatives and the U.S. Senate have each passed
differing reform bills that address a number of issues,
including healthcare cost-saving measures. Many of the proposals
could or would affect both public and private healthcare
programs and could adversely affect Medicare and other third
party payments to healthcare facilities, which, in turn, could
have a material adverse effect on us. Future healthcare reform
or legislation or changes in the administration or
implementation of governmental and non-governmental healthcare
reimbursement programs also could have a material adverse effect
on our operators’ liquidity, financial condition or results
of operations, which could adversely affect their ability to
satisfy their obligations to us and which, in turn, could have a
material adverse effect on us.
The President’s Budget, released on February 2, 2010,
assumed that health care reform legislation pending before
Congress would be passed and, therefore, did not directly
propose certain adjustments to Medicaid, Medicare and Medicare
Advantage Plans, which may or may not affect the operating
income of the operators of our healthcare properties. The impact
of these adjustments or lack thereof, if any, has not been
determined.
In an effort to reduce federal spending on healthcare, in 1997
the federal government enacted the Balanced Budget Act
(“BBA”), which contained extensive changes to the
Medicare and Medicaid programs, including substantial Medicare
reimbursement reductions for healthcare operations. For certain
healthcare providers, including hospitals and skilled nursing
facilities, implementation of the BBA resulted in more drastic
reimbursement reductions than had been anticipated. In addition
to its impact on Medicare, the BBA also afforded states more
flexibility in administering their Medicaid plans, including the
ability to shift most Medicaid enrollees into managed care plans
without first obtaining a federal waiver.
The following key legislative and regulatory changes have been
made to the BBA to provide some relief from the drastic
reductions in Medicare and Medicaid reimbursement resulting from
implementation of the BBA:
| • | The Balanced Budget Refinement Act of 1999 (“BBRA”); | |
| • | The Medicare, Medicaid, and State Child Health Insurance Program Benefits Improvement and Protection Act of 2000 (“BIPA”); |
14
| • | The one-time “administrative fix” to increase skilled nursing facility payment rates by 3.26%, instituted by the Centers for Medicare & Medicaid Services (“CMS”) beginning on October 1, 2003; | |
| • | The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“Medicare Modernization Act,” sometimes referred to as the “Drug Bill”); | |
| • | The Deficit Reduction Act of 2005 (Pub. L No 109-171) (“DRA”); | |
| • | The Tax Relief and Health Care Act of 2006 (Pub L. No. 109-432); and | |
| • | The Medicare, Medicaid, and SCHIP Extension Act of 2007 (Pub L. No. 110-173). |
In response to widespread healthcare industry concern about the
reductions in payments under the BBA, the federal government
enacted the Balanced Budget Refinement Act of 1999
(“BBRA”). The BBRA increased the per diem
reimbursement rates for certain high acuity patients by 20% from
April 1, 2000 until case mix refinements were implemented
by CMS, as explained below. The BBRA also imposed a two-year
moratorium on the annual cap mandated by the BBA on physical,
occupational and speech therapy services provided to a patient
by outpatient rehabilitation therapy providers, including
Part B covered therapy services in nursing facilities.
Relief from the BBA therapy caps was subsequently extended
multiple times by Congress, but these extensions expired on
December 31, 2009 and have not yet been renewed by
Congress. Therefore, effective January 1, 2010, Medicare
coverage of therapy services at nursing facilities paid for
under Medicare part B are capped at $1,860 per beneficiary
per year for occupational therapy services and $1,860 per
beneficiary for
speech-language
pathology and physical therapy services combined.
Pursuant to its final rule updating SNF Prospective Payment
System (“PPS”) for the 2006 federal fiscal year, CMS
refined the resource utilization groups (“RUGs”) used
to determine the daily payment for beneficiaries in skilled
nursing facilities by adding nine new payment categories. The
result of this refinement, which became effective on
January 1, 2006, was to eliminate the temporary add-on
payments that Congress enacted as part of the BBRA.
Under its final rule updating LTC-DRGs for the 2007 federal
fiscal year, CMS reduced reimbursement of uncollectible Medicare
coinsurance amounts for all beneficiaries (other than
beneficiaries of both Medicare and Medicaid) from 100% to 70%
for skilled nursing facility cost reporting periods beginning on
or after October 1, 2005. CMS estimated that this change in
treatment of bad debt would result in a decrease in payments to
skilled nursing facilities of $490 million over the
five-year period from federal fiscal year 2006 to 2010. The rule
also included various options for classifying and weighting
patients transferred to a skilled nursing facility after a
hospital stay less than the mean length of stay associated with
that particular diagnosis-related group.
On July 31, 2009, CMS issued its final rule updating SNF
PPS for the 2010 fiscal year (October 1, 2009 through
September 30, 2010). Under the final rule, the update to
the SNF PPS standard federal payment rate for skilled nursing
facilities includes a 2.2% increase in the market basket index
for the 2010 fiscal year. The final rule also provides a
recalibration in the case-mix indexes for the resource
utilization groups used to determine the daily payment for
beneficiaries in skilled nursing facilities that is expected to
reduce payments to skilled nursing facilities by 3.3% in fiscal
year 2010. CMS estimates that net payments to skilled nursing
facilities as a result of the market basket increase and the
recalibration in the case-mix indexes for RUGs under the final
rule would decrease by approximately $360 million, or 1.1%,
in fiscal year 2010.
The July 31, 2009 final rule includes other changes that
may additionally affect net payments to skilled nursing
facilities, including, by way of example, implementation of the
RUG-IV classification model for fiscal year 2011 and possible
new requirements for the quarterly reporting of nursing home
staffing data.
We cannot assure that future updates to the skilled nursing
facilities prospective payment system, therapy services or
Medicare reimbursement for skilled nursing facilities will not
materially adversely impact our tenants or operators, which in
turn could have a materially adverse affect on us. The Medicare
and Medicaid programs, including payment levels and methods, are
continually evolving and have been less predictable following
the enactment of BBA and the subsequent reform activities.
Moreover, the healthcare delivery system is under constant
scrutiny and has been identified by the new administration as a
key area of interest and likely reform. We cannot assure you
that future healthcare legislation, changes in the
administration or implementation of governmental
15
healthcare reimbursement programs will not have a material
adverse effect on our tenants’ and operators’
liquidity, financial condition or results of operations, which
could adversely affect their ability to make payments to us and
which, in turn, could have a material adverse effect on us.
Certificates
of Need and State Licensing
Certificate of need, or CON, regulations control the development
and expansion of healthcare services and facilities in certain
states. Some states also require regulatory approval prior to
changes in ownership of certain healthcare facilities. In the
last several years, in response to mounting Medicaid budget
deficits, many states have begun to tighten CON controls,
including the imposition of moratoriums on new facilities, and
the imposition of stricter controls over licensing and change of
ownership rules. States that do not have CON programs may have
other laws or regulations that limit or restrict the development
or expansion of healthcare facilities. To the extent that CONs
or other similar approvals are required for expansion or the
operations of our facilities, either through facility
acquisitions, expansion or provision of new services or other
changes, such expansion could be affected adversely by the
failure or inability of our tenants and operators to obtain the
necessary approvals, changes in the standards applicable to such
approvals or possible delays and expenses associated with
obtaining such approvals.
Americans
with Disabilities Act (the “ADA”)
Our properties must comply with the ADA to the extent that such
properties are “public accommodations” as defined in
that statute. The ADA may require removal of structural barriers
to access by persons with disabilities in certain public areas
of our properties where such removal is readily achievable. To
date, no notices of substantial noncompliance with the ADA have
been received by us. Accordingly, we have not incurred
substantial capital expenditures to address ADA concerns. In
some instances, our tenants and operators may be responsible for
any additional amounts that may be required to make facilities
ADA-compliant. Noncompliance with the ADA could result in
imposition of fines or an award of damages to private litigants.
The obligation to make readily achievable accommodations is an
ongoing one, and we continue to assess our properties and make
alterations as appropriate in this respect.
Environmental
Matters
A wide variety of federal, state and local environmental and
occupational health and safety laws and regulations affect
healthcare facility operations. These complex federal and state
statutes, and their enforcement, involve myriad regulations,
many of which involve strict liability on the part of the
potential offender. Some of these federal and state statutes may
directly impact us. Under various federal, state and local
environmental laws, ordinances and regulations, an owner or
operator of real property or a secured lender, such as us, may
be liable for the costs of removal or remediation of hazardous
or toxic substances at, under or disposed of in connection with
such property, as well as other potential costs relating to
hazardous or toxic substances (including government fines and
damages for injuries to persons, adjacent property,
and/or
natural resources). This may be true even if we did not cause or
contribute to the presence of such substances. The cost of any
required remediation, removal, fines or personal or property
damages and the owner’s or secured lender’s liability
therefore could exceed or impair the value of the property,
and/or
the
assets of the owner or secured lender. In addition, the presence
of such substances, or the failure to properly dispose of or
remediate such substances, may adversely affect the owner’s
ability to sell or rent such property or to borrow using such
property as collateral which, in turn, could reduce our
revenues. For a description of the risks associated with
environmental matters, see ITEM 1A.
“Risk
Factors.”
Competition
We compete for real estate property investments with healthcare
providers, other healthcare-related REITs, healthcare lenders,
real estate partnerships, banks, insurance companies and other
investors. Some of our competitors are significantly larger and
have greater financial resources and lower cost of capital than
we do.
The operators and managers of the properties in which we invest
compete on a local and regional basis with other landlords and
healthcare providers who own and operate healthcare-related real
estate. The occupancy and rental income at our properties depend
upon several factors, including the number of physicians using
the healthcare
16
facilities or referring patients to the facilities, the number
of patients or residents of the healthcare-related facilities,
competing properties and healthcare providers, and the size and
demographics of the population in the surrounding area. Private,
federal and state payment programs and the effect of laws and
regulations may also have a significant influence on the
profitability of the properties and their tenants.
Employees
We do not have any employees. Our officers are employees of our
manager and its affiliates. We do not have any separate
facilities and are completely reliant on our manager to conduct
our
day-to-day
operations. Our Manager is reimbursed for the cost of these
employees and the services delivered through a management fee
under the requirements of the Management Agreement by and
between Care and CIT Healthcare. See Item 7A. Quantitative
and Qualitative Disclosures About Market Risk “Related
Party Transactions and Agreements — Management
Agreement” below.
Certain
U.S. Federal Income Tax Considerations
The following discussion of “Certain U.S. Federal
Income Tax Considerations” is not inclusive of all possible
tax considerations and is not tax advice. This summary does not
deal with all tax aspects that might be relevant to a particular
stockholder in light of such stockholder’s circumstances,
nor does it deal with particular types of stockholders that are
subject to special treatment under the Internal Revenue Code
(the “Code”). Provisions of the Code governing the
federal income tax treatment of REITs and their stockholders are
highly technical and complex, and this summary is qualified in
its entirety by the applicable Code provisions, rules and
Treasury Regulations promulgated thereunder, and administrative
and judicial interpretations thereof. The following discussion
is based on current law, which could be changed at any time, and
possibly applied retroactively.
We elected on our 2007 U.S. income tax return to be taxed
as a REIT under Sections 856 through 860 of the Code for
our taxable year ended December 31, 2007. To qualify as a
REIT, we must meet certain organizational and operational
requirements, including a requirement to distribute at least 90%
of our REIT taxable income to stockholders. As a REIT, we
generally will not be subject to federal income tax on taxable
income that we distribute to our stockholders. If we fail to
qualify as a REIT in any taxable year, we will then be subject
to federal income tax on our taxable income at regular corporate
rates and we will not be permitted to qualify for treatment as a
REIT for federal income tax purposes for four years following
the year during which qualification is lost unless the Internal
Revenue Service grants us relief under certain statutory
provisions. Such an event could materially adversely affect our
net income and net cash available for distributions to
stockholders. However, we believe that we will operate in such a
manner as to qualify for treatment as a REIT and we intend to
operate in the foreseeable future in such a manner so that we
will qualify as a REIT for federal income tax purposes. We may,
however, be subject to certain state and local taxes.
The Code defines a REIT as a corporation, trust or association
(i) which is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of
beneficial interest; (iii) which would be taxable, but for
Sections 856 through 860 of the Code, as a domestic
corporation; (iv) which is neither a financial institution
nor an insurance company subject to certain provisions of the
Code; (v) the beneficial ownership of which is held by 100
or more persons; (vi) during the last half of each taxable
year not more than 50% in value of the outstanding stock of
which is owned, actually or constructively, by five or fewer
individuals; and (vii) which meets certain other tests,
described below, regarding the amount of its distributions and
the nature of its income and assets. The Code provides that
conditions (i) to (iv), inclusive, must be met during the
entire taxable year and that condition (v) must be met
during at least 335 days of a taxable year of
12 months, or during a proportionate part of a taxable year
of less than 12 months.
There are presently two gross income requirements for Care to
qualify as a REIT. First, for each taxable year, at least 75% of
Care’s gross income (excluding gross income from
“prohibited transactions” as defined below, and
certain hedging transactions entered into after July 30,
2008) must be derived directly or indirectly from
investments relating to real property or mortgages on real
property or from certain types of temporary investment income.
Second, at least 95% of Care’s gross income (excluding
gross income from prohibited transactions and qualifying hedges)
for each taxable year must be derived from income that qualifies
under the 75% test and other dividends,
17
interest and gain from the sale or other disposition of stock or
securities. A “prohibited transaction” is a sale or
other disposition of property (other than foreclosure property)
held primarily for sale to customers in the ordinary course of
our trade or business.
At the close of each quarter of Care’s taxable year, it
must also satisfy tests relating to the nature of its assets.
First, at least 75% of the value of Care’s total assets
must be represented by real estate assets (including shares of
stock of other REITs) cash, cash items, or government
securities. For purposes of this test, the term “real
estate assets” generally means real property (including
interests in real property and mortgages, and certain mezzanine
loans) and shares in other REITs, as well as any stock or debt
instrument attributable to the investment of the proceeds of a
stock offering or a public debt offering with a term of at least
five years, but only for the one-year period beginning on the
date the proceeds are received. Second, not more than 25% of
Care’s total assets may be represented by securities other
than those in the 75% asset class. Third, of the investments
included in the 25% asset class and except for certain
investments in other REITs, “qualified REIT
subsidiaries” and TRSs, the value of any one issuer’s
securities owned by Care may not exceed 5% of the value of
Care’s total assets, and Care may not own more than 10% of
the vote or value of the securities of any one issuer. Solely
for purposes of the 10% value test, however, certain securities
including, but not limited to, securities having specified
characteristics (“straight debt”), loans to an
individual or an estate, obligations to pay rents from real
property and securities issued by a REIT, are disregarded as
securities. Fourth, not more than 20% (25% for taxable years
beginning on or after January 1, 2009) of the value of
Care’s total assets may be represented by securities of one
or more TRSs.
Care, directly and indirectly, owns interests in various
partnerships and limited liability companies that are either
disregarded or treated as partnership for federal income tax
purposes. In the case of a REIT that is a partner in a
partnership or a member of a limited liability company that is
treated as a partnership under the Code, for purposes of the
REIT asset and income tests, the REIT will be deemed to own its
proportionate share of the assets of the partnership or limited
liability company and will be deemed to be entitled to its
proportionate share of gross income of the partnership or
limited liability company, in each case, determined in
accordance with the REIT’s capital interest in the entity
(subject to special rules related to the 10% asset test).
The ownership of an interest in a partnership or limited
liability company by a REIT may involve special tax risks,
including the challenge by the Internal Revenue Service of the
allocations of income and expense items of the partnership or
limited liability company, which would affect the computation of
taxable income of the REIT, and the status of the partnership or
limited liability company as a partnership (as opposed to an
association taxable as a corporation) for federal income tax
purposes.
Care also owns interests in a number of subsidiaries which are
intended to be treated as qualified REIT subsidiaries (each a
“QRS”). The Code provides that such subsidiaries will
be ignored for federal income tax purposes and all assets,
liabilities and items of income, deduction and credit of such
subsidiaries will be treated as the assets, liabilities and such
items of Care. If any partnership, limited liability company or
subsidiary in which Care owns an interest were treated as a
regular corporation (and not as a partnership, subsidiary REIT,
QRS or taxable REIT subsidiary, as the case may be) for federal
income tax purposes, Care would likely fail to satisfy the REIT
asset tests described above and would therefore fail to qualify
as a REIT, unless certain relief provisions apply. Care believes
that each of the partnerships, limited liability companies and
subsidiaries (other than taxable REIT subsidiaries), in which it
owns an interest will be treated for tax purposes as a
partnership, disregarded entity (in the case of a 100% owned
limited liability company), REIT or QRS, as applicable, although
no assurance can be given that the Internal Revenue Service will
not successfully challenge the status of any such organization.
A REIT may own any percentage of the voting stock and value of
the securities of a corporation which jointly elects with the
REIT to be a TRS, provided certain requirements are met. A TRS
generally may engage in any business, including the provision of
customary or noncustomary services to tenants of its parent REIT
and of others, except a TRS may not manage or operate a hotel or
healthcare facility. A TRS is treated as a regular corporation
and is subject to federal income tax and applicable state income
and franchise taxes at regular corporate rates. In addition, a
100% tax may be imposed on a REIT if its rental, service or
other agreements with its TRS, or the TRS’s agreements with
the REIT’s tenants, are not on arm’s-length terms. As
of December 31, 2009, Care did not own any interests in
subsidiaries which have elected to be taxable REIT subsidiaries
(each a “TRS”).
18
In order to qualify as a REIT, Care is required to distribute
dividends (other than capital gain dividends) to its
stockholders in an amount at least equal to (A) the sum of
(i) 90% of its “real estate investment trust taxable
income” (computed without regard to the dividends paid
deduction and its net capital gain) and (ii) 90% of the net
income, if any (after tax), from foreclosure property, minus
(B) the sum of certain items of non-cash income. Such
distributions must be paid, or treated as paid, in the taxable
year to which they relate. At Care’s election, a
distribution will be treated as paid in a taxable year if it is
declared before Care timely files its tax return for such year,
and is paid on or before the first regular dividend payment
after such declaration, provided such payment is made during the
twelve month period following the close of such year. To the
extent that Care does not distribute all of its net long-term
capital gain or distributes at least 90%, but less than 100%, of
its “real estate investment trust taxable income,” as
adjusted, Care will be required to pay tax on the undistributed
amount at regular federal and state corporate tax rates.
Furthermore, if Care fails to distribute during each calendar
year at least the sum of (i) 85% of its ordinary income for
such year, (ii) 95% of its capital gain net income for such
year and (iii) any undistributed taxable income from prior
periods, Care would be required to pay, in addition to regular
federal and state corporate tax, a non-deductible 4% excise tax
on the excess of such required distributions over the amounts
actually distributed. While historically Care has satisfied the
distribution requirements discussed above by making cash
distributions to its shareholders, a REIT is permitted to
satisfy these requirements by making distributions of cash or
other property, including, in limited circumstances, its own
stock. For distributions with respect to taxable years ending on
or before December 31, 2009, recent Internal Revenue
Service guidance allows us to satisfy up to 90% of the
distribution requirements discussed above through the
distribution of shares of Care common stock, if certain
conditions are met.
Corporate
Governance Guidelines
The Company has adopted Corporate Governance Guidelines relating
to the conduct and operations of the board of directors. The
Corporate Governance Guidelines are posted on the Company’s
website (
www.carereit.com
).
Committee
Charters
The Board of Directors has an Audit Committee and a
Compensation, Nominating and Governance Committee, which was
formed on January 28, 2010, when the board combined the
functions of the then Compensation Committee and the Nominating,
Corporate Governance and Investment Oversight Committee. The
board of directors has adopted a written charter for the Audit
Committee which is available on the Company’s website
(
www.carereit.com
) and is in the process of adopting a
charter for the Compensation, Nominating and Governance
Committee.
Codes of
Conduct
The Company has adopted for the officers and board of directors
of Care a Code of Ethical Conduct to govern its business
practices. In addition, the Company has adopted a Code of
Business Conduct, not only as guidance for officers and
directors of Care, but for the employees of our Manager, CIT
Healthcare LLC, and its affiliates, who provide services and
support to Care. Copies of each code are available on the
Company’s website (
www.carereit.com
).
19
| ITEM 1A. | Risk Factors |
Risks
Related to the Tiptree Transaction
On March 16, 2010, we announced the entry into a definitive
purchase and sale agreement with Tiptree Financial Partners,
L.P. (“Tiptree”) under which we have agreed to sell a
significant amount of newly issued common stock to Tiptree at
$9.00 per share. The sale of common stock to Tiptree is expected
to result in a change in control of our company. Pursuant to the
purchase and sale agreement, we have agreed to launch a cash
tender offer to all of our stockholders to purchase their common
stock at $9.00 per share. The following are risks associated
with these contemplated transactions. The discussion of the
terms of the purchase and sale agreement below is qualified in
its entirety by the terms of the agreement itself, which has
been filed as Exhibit 10.1 to the Company’s
Form 8-K
filed on March 16, 2010.
The
Tiptree transaction is subject to conditions, and there can be
no assurance that these conditions will be met.
Pursuant to the purchase and sale agreement, Tiptree’s
obligation to purchase common stock is subject to certain
conditions being met, including: (i) the representations
and warranties of the Company in the purchase and sale agreement
being true and correct; (ii) the Company performing all
covenants and obligations required to be performed under the
purchase and sale agreement, (iii) a registration rights
agreement and escrow agreement being executed and in full force
and effect, (iv) the receipt of all required third party
consents, (v) the absence of a Company Material Adverse
Effect (as defined in the purchase and sale agreement),
(vi) the resignation of three of our current directors and
the appointment of four designees from Tiptree to our board of
directors, (vii) the receipt of an opinion of counsel
regarding the validity of the shares issued to Tiptree, and
(viii) the absence of any restraining orders or injunctions
relating to the contemplated transactions. If any one or more of
these conditions is not met, or waived, then the Tiptree
transaction will not be completed.
The
tender offer contemplated in the Tiptree transaction is subject
to conditions, and there can be no assurance that these
conditions will be met.
Pursuant to the purchase and sale agreement, our obligation to
accept for payment shares validly tendered and not withdrawn on
the expiration date of the tender offer is subject to the
following conditions being met: (i) there being validly
tendered and not withdrawn prior to the expiration date a
minimum of 10,300,000 shares of our common stock,
(ii) Tiptree having deposited in escrow the maximum amount
of funds required to be deposited pursuant to the purchase and
sale agreement, (iii) approval by our stockholders of the
sale of common stock to Tiptree and the abandonment of our
previously approved plan of liquidation, (iv) any waiting
period applicable to the contemplated transactions having
expired or been terminated under the Hart-Scott-Rodino
Antitrusts Improvements Act of 1976, as amended, (v) the
accuracy of the representations and warranties of Tiptree,
(vi) the performance by Tiptree of the covenants and
obligations required under the purchase and sale agreement,
(vii) the escrow agreement being in full force and effect,
(viii) the receipt of any consents required by Tiptree,
(ix) the absence of any temporary restraining order,
injunction or court order preventing the consummation of the
contemplated transactions, or any statute, rule, regulation, or
order preventing or prohibiting the consummation of the
contemplated transactions and (x) the absence of any
Tiptree material adverse effect. If any one or more of these
conditions is not met or waived, then we will have the right,
under certain circumstances, to terminate the tender offer.
Even
if the conditions to completion of the Tiptree transaction and
the associated tender offer are met, there can be no assurance
that these transactions will be completed in a timely manner,
under the same terms or at all.
There can be no assurance that the Tiptree transaction and the
associated tender offer will be completed in a timely manner,
under the same terms, or at all. If the Tiptree transaction is
terminated for any reason, then the tender offer will also be
terminated, and you will not receive the purchase price for your
common stock.
20
If the
contemplated transactions are not completed, we may pursue the
plan of liquidation previously approved by our stockholders or
continue to pursue other strategic alternatives.
If the contemplated transactions are not completed for any
reason (including if the stockholders fail to approve the
issuance of the stock to Tiptree or the abandonment of the plan
of liquidation), we may pursue the plan of liquidation
previously approved by our stockholders. In the event that a
liquidation of the Company is pursued, material adjustments to
these going concern financial statements may need to be recorded
to present liquidation basis financial statements. Material
adjustments which may be required for liquidation basis
accounting primarily relate to reflecting assets and liabilities
at their net realizable value and costs to be incurred to carry
out the plan of liquidation. After such adjustments, the likely
range of equity value which would be presented in liquidation
basis financial statements would be between $8.05 and 8.90 per
share. If the contemplated transactions are not completed for
any reason (including if the stockholders fail to approve the
issuance of stock to Tiptree or the abandonment of the plan of
liquidation), we continue to reserve the right to entertain
other proposals from third parties to enter into an alternative
transaction that returns value to our stockholders, and, if
required by applicable law, we will seek stockholder approval
for any such alternative transaction.
Risks
Related to Our Business
Adverse
economic and geopolitical conditions and disruptions in the
credit markets could have a material adverse effect on our
results of operations, financial condition and ability to pay
distributions to our stockholders.
Our business has been and may continue to be affected by market
and economic challenges experienced by the global economy or
real estate industry as a whole or by the local economic
conditions in the markets where our properties may be located,
including the current dislocations in the credit markets and
general global economic recession. These current conditions, or
similar conditions existing in the future, may adversely affect
our results of operations, financial condition and ability to
pay distributions as a result of the following, among other
potential consequences:
| • | the financial condition of our borrowers, tenants and operators may be adversely affected, which may result in defaults under loans or leases due to bankruptcy, lack of liquidity, operational failures or for other reasons; | |
| • | foreclosures and losses on our healthcare-related real estate investments and mortgage loans could be higher than those generally experienced in the mortgage lending industry because a portion of the investments we make may be subordinate to other creditors; | |
| • | our loan-to-value ratio of loans that we have previously extended would increase and our collateral coverage would weaken and increase the possibility of a loss in the event of a borrower default if there is a material decline in real estate values; | |
| • | our ability to borrow on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to refinance existing debt, reduce our returns from our acquisition activities and increase our future interest expense; and | |
| • | reduced values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans. |
We are
dependent upon our Manager for our success and may not find a
suitable replacement if the management agreement is terminated
or such key personnel are no longer available to
us.
We do not have any employees. Our officers are employees of our
Manager and its affiliates. We do not have any separate
facilities and are completely reliant on our Manager to conduct
our
day-to-day
operations. We depend on the diligence, skill and network of
business contacts of our Manager. Our executive officers and our
Manager monitor our investments. The management agreement does
not require our Manager to dedicate specific personnel to
fulfilling its obligations to us under the management agreement,
or require personnel to dedicate a specific amount of time. The
departure of a significant number of the professionals of our
Manager could have a material adverse effect on our performance.
On January 15, 2010, we entered into an amended and
restated management
21
agreement with our Manager, which, among other things, extends
the term of the management agreement through December 31,
2011. We are subject to the risk that our Manager may terminate
the management agreement and that no suitable replacement will
be found to manage us. Our Manager has a right to terminate the
management agreement without cause under certain circumstances.
We can offer no assurance that our Manager will remain our
external manager, that we will be able to find an adequate
replacement for our Manager should our Manager terminate the
management agreement, or that we will continue to have access to
our Manager’s principals and professionals.
We may
be unable to generate sufficient revenue from operations to pay
our operating expenses and to make distributions to our
stockholders.
As a REIT, we generally are required to distribute at least 90%
of our REIT taxable income each year to our stockholders and we
intend to pay quarterly dividends to our stockholders such that
we distribute all or substantially all of our taxable income
each year, subject to certain adjustments and sufficient
available cash. However, our ability to pay dividends may be
adversely affected by the risk factors described in this
document. In the event of a downturn in our operating results
and financial performance or unanticipated declines in the value
of our asset portfolio, we may be unable to pay quarterly
dividends to our stockholders. The timing and amount of our
dividends are in the sole discretion of our board of directors,
and will depend upon, among other factors, our earnings,
financial condition, maintenance of our REIT qualification and
other tax considerations and capital expenditure requirements,
in each case as our board of directors may deem relevant from
time to time.
Among the factors that could adversely affect our results of
operations and impair our ability to pay dividends to our
stockholders are:
| • | the profitability of our investments; | |
| • | defaults in our asset portfolio or decreases in the value of our portfolio; and | |
| • | the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates. |
A change in any one of these factors could affect our ability to
pay dividends. We cannot assure our stockholders that we will be
able to pay dividends in the future or that the level of any
dividends we pay will increase over time.
In addition, dividends paid to stockholders are generally
taxable to our stockholders as ordinary income, but a portion of
our dividends may be designated by us as long-term capital gains
to the extent they are attributable to capital gain income
recognized by us, or may constitute a return of capital to the
extent they exceed our earnings and profits as determined for
tax purposes. Distributions in excess of our earnings and
profits generally may be tax-free to the extent of each
stockholder’s basis in our common stock and generally may
be treated as capital gain if they are in excess of basis.
Risk
Related to a Liquidation
On December 10, 2009, our Board of Directors approved a
plan of liquidation and recommended that our shareholders
approve the plan of liquidation. On January 28, 2010, our
stockholders approved the plan of liquidation. We have entered
into a definitive agreement for the sale of control of the
Company and have not pursued the plan of liquidation. The
following risk factors would apply in the event that we fail to
close the Tiptree transaction and pursue the plan of liquidation.
Pursuing
the plan of liquidation may cause us to fail to qualify as a
REIT, which would lower the amount of our distributions to our
stockholders.
We value our status as a REIT under the tax code because while
we qualify as a REIT and distribute all of our taxable income,
we generally are not subject to federal income tax. Although our
board of directors does not presently intend to terminate our
REIT status prior to the final distribution of our assets and
our dissolution, our board of directors may take actions
pursuant to the plan of liquidation which would result in such a
loss of REIT status. Upon the final distribution of our assets
and our dissolution, our existence and our REIT status will
terminate.
22
However, there is a risk that our actions in pursuit of the plan
of liquidation may cause us to fail to meet one or more of the
requirements that must be met in order to qualify as a REIT
prior to completion of the plan of liquidation. For example, to
qualify as a REIT, at least 75% of our gross income must come
from real estate sources and 95% of our gross income must come
from real estate sources and certain other sources that are
itemized in the REIT tax laws, mainly interest and dividends. We
may encounter difficulties satisfying these requirements as part
of the liquidation process. In addition, in selling our assets,
we may recognize ordinary income in excess of the cash received.
The REIT rules require us to pay out a large portion of our
ordinary income in the form of a dividend to stockholders.
However, to the extent that we recognize ordinary income without
any cash available for distribution, and if we are unable to
borrow to fund the required dividend or find another way to meet
the REIT distribution requirements, we may cease to qualify as a
REIT. While we expect to comply with the requirements necessary
to qualify as a REIT in any taxable year, if we are unable to do
so, we will, among other things (unless entitled to relief under
certain statutory provisions):
| • | not be allowed a deduction for dividends paid to stockholders in computing our taxable income; | |
| • | be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates; | |
| • | be subject to increased state and local taxes; and | |
| • | be disqualified from treatment as a REIT for the taxable year in which we lose our qualification and for the four following taxable years. |
As a result of these consequences, our failure to qualify as a
REIT could substantially reduce the funds available for
distribution to our stockholders.
We do
not know the exact amount or timing of potential liquidation
distributions.
We cannot assure our stockholders of the precise nature and
amount of any distributions to our stockholders pursuant to the
plan of liquidation. Furthermore, the timing of our
distributions will be affected, in large part, by our ability to
sell our remaining assets in a timely and orderly manner.
Our assets currently consist of one mortgage loan and
investments in three healthcare real estate
portfolios — the Cambridge medical office building
portfolio, the Bickford assisted living, independent living and
Alzheimer facility portfolio and the SMC independent and
assisted living facility portfolio.
Management’s estimates of the values of our mortgage loan
assets are based on comparable sales figures in prior mortgage
loan sales, discussions with bidders and brokers and a
confirmatory valuation provided by an outside valuation expert.
Management’s estimates of the values of our healthcare real
estate investments are based on management’s projections
and models, the values ascribed to such investments by bidders
for the company, comparable sales figures, discussions with
brokers, and, with respect to our investments in Bickford and
SMC, a confirmatory valuation provided to us by an outside
valuation expert. Management’s estimate of the value of our
85% interest in the Cambridge medical office building portfolio
is based on a net present value of the future cash flows that we
expect to receive from our Cambridge investment, minus our
estimated costs for operating our company during our projected
holding period for our Cambridge investment. There can be no
assurance that we will be able to find buyers for any or all of
our assets, and if we are able to sell such assets, there can be
no guaranty that the value received upon such sale will be
consistent with management’s estimates.
Potential purchasers of our assets may try to take advantage of
our liquidation process and offer
less-than-optimal
prices for our assets. We intend to seek and obtain the highest
sales prices reasonably available for our assets, and believe
that we can out-wait bargain-hunters; however, we cannot predict
how changes in local real estate markets or in the national
economy may affect the prices that we can obtain in the
liquidation process. Therefore, there can be no assurance that
we will receive the proceeds we expect for the sale of our
assets.
The actual amount available for distribution could be more or
less than the range of net liquidating distributions that we
estimated in our proxy statement filed on December 28, 2009
(the “Liquidation Proxy Statement”), as updated in the
Form 8-K
that we filed on January 15, 2010 to announce the amendment
to our
23
management agreement (the “Total Liquidation Value
Range”), depending on a number of other factors including
(i) unknown liabilities or claims, (ii) unexpected or
greater or lesser than expected expenses, and (iii) greater
or lesser than anticipated net proceeds of asset sales.
Distributions will depend on the amount of proceeds we receive
from the sale of our assets, when we receive them, and the
extent to which we must establish reserves for current or future
liabilities.
We are currently unable to predict the precise timing of any
distributions pursuant to the plan of liquidation. The timing of
any distribution will depend upon and could be delayed by, among
other things, the timing of the sale of our company’s
assets.
Additionally, a creditor could seek an injunction against our
making distributions to our stockholders on the ground that the
amounts to be distributed were needed for the payment of the
liabilities and expenses. Any action of this type could delay or
substantially diminish the amount, if any, available for
distribution to our stockholders.
If we
are unable to find buyers for our assets at our expected sales
prices, our liquidating distributions may be delayed or
reduced.
As of the date of this annual report on
Form 10-K,
none of our mortgage loans or healthcare real estate assets are
subject to a binding sale agreement providing for their sale. In
calculating our Total Liquidation Value Range for our assets, we
assumed that we will be able to find buyers for all of our
assets at amounts based on our estimated range of values for
each investment. However, we may have overestimated the sales
prices that we will ultimately be able to obtain for these
assets. For example, in order to find buyers in a timely manner,
we may be required to lower our asking price below the low end
of our current estimate of the asset’s market value. If we
are not able to find buyers for these assets in a timely manner
or if we have overestimated the sales prices we will receive,
our liquidating payments to our stockholders would be delayed or
reduced. Furthermore, real estate values are constantly changing
and fluctuate with changes in interest rates, supply and demand
dynamics, occupancy percentages, lease rates, the availability
of suitable buyers, the perceived quality and dependability of
income flows from tenancies and a number of other factors, both
local and national. Our liquidation proceeds may also be
affected by the terms of prepayment or assumption costs
associated with debt encumbering our healthcare real estate
assets. In addition, minority ownership matters, transactional
fees and expenses, environmental contamination at our healthcare
real estate assets or unknown liabilities, if any, may adversely
impact the net liquidation proceeds from those assets.
Decreases
in property values may reduce the amount we receive upon a sale
of our assets.
The underlying value of our healthcare real estate assets may be
reduced by a number of factors that are beyond our control,
including, without limitation, the following:
| • | adverse changes in economic conditions; | |
| • | the financial performance of our tenants, and the ability of our tenants to satisfy their obligations under their leases; | |
| • | potential major repairs which are not presently contemplated or other contingent liabilities associated with the assets; | |
| • | terminations and renewals of leases by our tenants; | |
| • | changes in interest rates and the availability of financing; | |
| • | competition; and | |
| • | changes in real estate tax rates and other operating expenses |
Any reduction in the value of our healthcare real estate assets
would make it more difficult for us to sell such assets for the
amounts that we have estimated. Reductions in the amounts that
we receive when we sell our assets could decrease or delay the
payment of distributions to stockholders.
24
If our
liquidation costs or unpaid liabilities are greater than we
expect, our potential liquidating distributions may be delayed
or reduced.
Before making the final liquidating distribution, we will need
to pay or arrange for the payment of all of our transaction
costs in the liquidation, all other costs and all valid claims
of our creditors. Our board of directors may also decide to
acquire one or more insurance policies covering unknown or
contingent claims against us, for which we would pay a premium
which has not yet been determined. Our board of directors may
also decide to establish a reserve fund to pay these contingent
claims. The amounts of transaction costs that we will incur in
the liquidation are not yet final, so we have used estimates of
these costs in calculating our Total Liquidation Value Range. To
the extent that we have underestimated these costs in
calculating our projections, our actual liquidation value may be
lower than our estimated Total Liquidation Value Range. In
addition, if the claims of our creditors are greater than we
have anticipated or we decide to acquire one or more insurance
policies covering unknown or contingent claims against us, our
liquidating distributions may be delayed or reduced. Further, if
a reserve fund is established, payment of liquidating
distributions to our stockholders may be delayed or reduced.
The
sale of our assets may cause us to be subject to a 100% excise
tax on “prohibited transactions,” which would reduce
the amount of potential liquidating distributions.
REITs are subject to a 100% excise tax on any gain from
“prohibited transactions,” which include sales or
other dispositions of assets held for sale to customers in the
ordinary course of the REIT’s trade or business. The
determination of whether property is held for sale to customers
in the ordinary course of our trade or business is inherently
factual in nature and, thus, cannot be predicted with certainty.
The tax code does provide a “safe harbor” which, if
all its conditions are met, would protect a REIT’s property
sales from being considered prohibited transactions, but we may
not be able to satisfy these conditions. While we do not believe
that any of our property should be considered to be held for
sale to customers in the ordinary course of our trade or
business, because of the substantial number of properties that
would have to be sold and the active marketing that would be
necessary, there is a risk that the Internal Revenue Service
would seek to treat some or all of the property sales as
prohibited transactions, resulting in the payment of taxes by us
as described above, in which case the amount available for
distribution to our stockholders could be significantly reduced.
If we
are unable to satisfy all of our obligations to creditors, or if
we have underestimated our future expenses, the amount of
potential liquidation proceeds will be reduced.
If we pursue the liquidation, we will file articles of
dissolution with the State Department of Assessments and
Taxation of Maryland promptly after the sale of all of our
remaining assets or at such time as our directors have
transferred our company’s remaining assets, subject to its
liabilities, into a liquidating trust. Pursuant to Maryland law,
our company will continue to exist for the purpose of
discharging any debts or obligations, collecting and
distributing its assets, and doing all other acts required to
liquidate and wind up its business and affairs. We intend to pay
for all liabilities and distribute all of our remaining assets,
which may be accomplished by the formation of a liquidating
trust, before we file our articles of dissolution.
Under Maryland law, certain obligations or liabilities imposed
by law on our stockholders, directors, or officers cannot be
avoided by the dissolution. For example, if we make
distributions to our stockholders without making adequate
provisions for payment of creditors’ claims, our
stockholders could be liable to the creditors to the extent of
the distributions in excess of the amount of any payments due to
creditors. The liability of any stockholder is, however, limited
to the amounts previously received by such stockholder from us
(and from any liquidating trust). Accordingly, in such event, a
stockholder could be required to return all liquidating
distributions previously made to such stockholder and a
stockholder could receive nothing from us under the plan of
liquidation. Moreover, in the event a stockholder has paid taxes
on amounts previously received as a liquidation distribution, a
repayment of all or a portion of such amount could result in a
stockholder incurring a net tax cost if the stockholder’s
repayment of an amount previously distributed does not cause a
commensurate reduction in taxes payable. Therefore, to the
extent that we have underestimated the size of our contingency
reserve and distributions to our stockholders have already been
made, our stockholders may be required to return some or all of
such distributions.
25
Stockholders
could be liable to creditors to the extent of liquidating
distributions received if contingent reserves are insufficient
to satisfy our liabilities.
If a court holds at any time that we have failed to make
adequate provision for our expenses and liabilities or if the
amount ultimately required to be paid in respect of such
liabilities exceeds the amount available from the contingency
reserve and the assets of the liquidating trust, our creditors
could seek an injunction to prevent us from making distributions
under the plan of liquidation on the grounds that the amounts to
be distributed are needed to provide for the payment of our
expenses and liabilities. Any such action could delay or
substantially diminish the cash distributions to be made to
stockholders
and/or
holders of beneficial interests of the liquidation trust under
the plan of liquidation.
Distributions
by us may include a return of capital.
Distributions payable to stockholders may include a return of
capital as well as a return in excess of capital. Distributions
exceeding taxable income will constitute a return of capital for
federal income tax purposes to the extent of a
stockholder’s basis. Distributions in excess of tax basis
will generally constitute capital gain.
We
face potential risks with asset sales.
Risks associated with the sale of properties which, if they
materialize, may have a material adverse effect on amounts our
stockholders may receive, include:
| • | lack of demand by prospective buyers; | |
| • | inability to find qualified buyers; | |
| • | inability of buyers to obtain satisfactory financing; | |
| • | lower than anticipated sale prices; and | |
| • | the inability to close on sales of properties under contract. |
The
market price of our common stock may decline as we make
potential liquidating distributions to our
stockholders.
Our
stock may be delisted from the New York Stock
Exchange.
Under the rules of the New York Stock Exchange, the exchange has
discretionary authority to delist our common stock if we proceed
with a plan of liquidation. In addition, the exchange will
commence delisting proceedings against us if (i) the
average closing price of our common stock falls below $1.00 per
share over a
30-day
consecutive trading period, (ii) our average market
capitalization falls below $15 million over a
30-day
consecutive trading period, or (iii) we lose our REIT
qualification. Even if the New York Stock Exchange does not move
to delist our common stock, we may voluntarily delist our common
stock from the exchange in an effort to reduce our operating
expenses and maximize our liquidating distributions. If our
common stock is delisted, our stockholders may have difficulty
trading our common stock on the secondary market.
Our
stockholders will not be able to buy, sell or transfer our
shares of common stock after we file our Articles of
Dissolution.
We may close our transfer books as of the close of business on
the date on which we file Articles of Dissolution with the State
Department of Assessments and Taxation of Maryland (the
“Final Record Date”) if we proceed with a plan of
liquidation. If we follow this course, we anticipate that the
Final Record Date will be after the sale of all of our assets or
such earlier time as our board of directors transfers all of our
remaining assets into a liquidating trust. After the Final
Record Date, we will not record any further transfers of our
shares of common stock except pursuant to the provisions of a
deceased stockholder’s will, intestate succession or
operation of law and we will not issue any new stock
certificates other than replacement certificates. In addition,
after the Final Record Date, we will not issue any shares of
common stock upon exercise of outstanding options. Our
stockholders’ interests in a liquidating trust
26
are likely to be non-transferable except by will, intestate
succession or operation of law. It is anticipated that no
further transfers of our shares of common stock will be
recognized after the final record date.
Our
board of directors will have the authority to sell our assets
under terms less favorable than those assumed for the purpose of
estimating our net liquidation value range in the Liquidation
Proxy Statement.
Pursuant to the plan of liquidation, our board of directors has
the authority to sell any and all of our assets on such terms
and to such parties as our board of directors determines in its
sole discretion. Our stockholders have no opportunity to vote on
such matters and will, therefore, have no right to approve or
disapprove the terms of such sales.
Our
shareholders approved a plan of liquidation on January 28,
2010; however, our board of directors may amend the plan of
liquidation at any time.
Even though our stockholders approved the plan of liquidation,
our board of directors may amend the plan of liquidation without
further stockholder approval, to the extent permitted by
Maryland law.
If we
continue with the plan of liquidation, distributing interests in
a liquidating trust may cause our stockholders to recognize gain
prior to the receipt of cash.
The REIT provisions of the tax code generally require that each
year we distribute as a dividend to our stockholders 90% of our
REIT taxable income (determined without regard to the dividends
paid deduction and excluding net capital gain). Liquidating
distributions we make pursuant to a plan of liquidation will
qualify for the dividends paid deduction, provided that they are
made within 24 months of the adoption of such plan.
Conditions may arise which cause us not to be able to liquidate
within such
24-month
period. For instance, it may not be possible to sell our assets
at acceptable prices during such period. In such event, rather
than retain our assets and risk losing our status as a REIT, we
may elect to contribute our remaining assets and liabilities to
a liquidating trust in order to meet the
24-month
requirement. We may also elect to contribute our remaining
assets and liabilities to a liquidating trust within such
24-month
period to avoid the costs of operating as a public company. Such
a contribution would be treated as a distribution of our
remaining assets to our stockholders, followed by a contribution
of the assets to the liquidating trust. As a result, a
stockholder would recognize gain to the extent his share of the
cash and the fair market value of any assets received by the
liquidating trust was greater than the stockholder’s basis
in his stock, notwithstanding that the stockholder would not
contemporaneously receive a distribution of cash or any other
assets with which to satisfy the resulting tax liability. In
addition, it is possible that the fair market value of the
assets received by the liquidating trust, as estimated for
purposes of determining the extent of the stockholder’s
gain at the time interests in the liquidating trust are
distributed to the stockholders, will exceed the cash or fair
market value of property received by the liquidating trust on a
sale of the assets. In this case, the stockholder would
recognize a loss in a taxable year subsequent to the taxable
year in which the gain was recognized, which loss may be limited
under the Code.
If we
pursue the plan of liquidation our accounting basis may change,
which could require us to write down our assets.
If we pursue liquidation, we must change our basis of accounting
from the going-concern basis to the liquidation basis of
accounting.
In order for our financial statements to be in accordance with
generally accepted accounting principles under the liquidation
basis of accounting, all of our assets must be stated at their
estimated net realizable value, and all of our liabilities must
be recorded at the estimated amounts at which the liabilities
are expected to be settled. Based on the most recent available
information, if the plan of liquidation is adopted, we may make
liquidating distributions that exceed the carrying amount of our
net assets. However, we cannot assure our stockholders what the
ultimate amounts of such liquidating distributions will be.
Therefore, there is a risk that the liquidation basis of
accounting may entail write-downs of certain of our assets to
values substantially less than their respective current carrying
amounts, and may require that certain of our liabilities be
increased or certain other liabilities be recorded to reflect
the anticipated effects of an orderly liquidation.
27
Until we determine to pursue the liquidation, we will continue
to account for our assets and liabilities under the
going-concern basis of accounting. Under the going-concern
basis, assets and liabilities are expected to be realized in the
normal course of business. However, long-lived assets to be sold
or disposed of should be reported at the lower of carrying
amount or estimated fair value less cost to sell. For long-lived
assets to be held and used, when a change in circumstances
occurs, our management must assess whether we can recover the
carrying amounts of our long-lived assets. If our management
determines that, based on all of the available information, we
cannot recover those carrying amounts, an impairment of value of
our long-lived assets has occurred and the assets should be
written down to their estimated fair value.
In addition, write-downs in our assets could reduce the price
that a third party would be willing to pay to acquire our
stockholders’ shares or our assets.
Our
dispute with Cambridge regarding our ability to transfer our
interests in the Cambridge medical office building portfolio may
impair the value of such interests, and if we are not successful
in our declaratory judgment action against Cambridge, our
ability to transfer our interests in the portfolio may be
restricted.
Further,
if we are not successful in defending against Cambridge’s
counterclaim, our ability to carry out transactions may be
restricted and we may incur losses.
Cambridge, our joint venture partner in the Cambridge medical
office building portfolio, has asserted that it possesses the
contractual right to approve any transfer, either directly or
indirectly, of our interests in the portfolio. We have in the
past disagreed and continue to disagree with Cambridge’s
assertion and strongly believe that we have the right to
transfer, without the approval of Cambridge, our Cambridge
interests either through a business combination transaction
involving our company or the sale of our wholly owned subsidiary
that serves as the general partner of the partnership that holds
the direct investment in the portfolio. We contend that
Cambridge does not have the
indirect
right to control the
business combination and other activities of the parent entities
of the entity through which we made our direct investment in the
portfolio. On November 25, 2009, we filed a complaint in
federal district court in Texas against Cambridge and its
affiliates seeking, among other things, a declaratory judgment
to that effect. On January 27, 2010, the Saada Parties
answered our complaint, and simultaneously filed counterclaims
and a third-party complaint (the “Counterclaims”) that
named our subsidiaries ERC Sub LLC and ERC Sub, L.P., external
manager CIT Healthcare LLC, and Board Chairman Flint D.
Besecker, as additional third-party defendants. The
Counterclaims seek four declaratory judgments construing certain
contracts among the parties that are basically the mirror image
of our declaratory judgment claims. In addition, the
Counterclaims also seek monetary damages for purported breaches
of fiduciary duty and the duty of good faith and fair dealing,
as well as fraudulent inducement, against us and the third-party
defendants jointly and severally. The Counterclaims further
request indemnification by ERC Sub, L.P., pursuant to a contract
between the parties, and the imposition of a “constructive
trust” on the proceeds of any future liquidation of Care,
to ensure a reservoir of funds from which any liability to the
Saada Parties could be paid. Although the Counterclaims do not
itemize their asserted damages, they assign these damages a
value of $100 million “or more.” In response to
the Counterclaims, Care and the third-party defendants filed on
March 5, 2010, an omnibus motion to dismiss all of the
Counterclaims. Unsuccessful resolution of our dispute with
Cambridge may impair the value of our Cambridge interests, which
may reduce the amount of liquidating distributions our
stockholders receive. In addition, if we are not successful in
our declaratory judgment action, our ability to transfer our
Cambridge interests may be restricted. Resolution of our dispute
with Cambridge may take a considerable amount of time. We also
cannot predict when our dispute with Cambridge will be resolved,
if at all. Further, if we are not successful in defending
against Cambridge’s counterclaim, our ability to carry out
transactions may be restricted and we may incur losses.
If we
are not successful in our declaratory judgment action seeking
confirmation that the partnership interests held by Cambridge in
the entity through which we made our investment in the Cambridge
medical office building portfolio are not entitled to receive
liquidating distributions from us, then the amount of potential
liquidating distributions available to our stockholders may be
reduced.
In connection with our investment in the Cambridge medical
office building portfolio, we agreed to cause the entity through
which our investment was made to issue operating partnership
units to Cambridge. The partnership agreement states that these
partnership units are entitled to receive an amount per unit
linked to the regular
quarterly
28
dividends declared and paid on Care common stock. Cambridge has
asserted that these partnership units are also entitled to
receive amounts linked to other liquidating distributions that
our board may declare and pay to our stockholders. We have
disagreed and continue to disagree with this assertion. On
November 25, 2009, we filed a complaint in federal district
court in Texas against Cambridge and its affiliates seeking,
among other things, a declaratory judgment that the partnership
units held by Cambridge are not entitled to receive any amounts
linked to any other special cash distributions declared and paid
by our board to our stockholders apart from cash distributions
linked to the regular
quarterly
dividends paid to our
stockholders. On January 27, 2010, the Saada Parties
answered our complaint, and simultaneously filed counterclaims
and a third-party complaint alleging, among other things, that
they are entitled to receive the special cash distributions. If
we are not successful in our declaratory judgment action, the
amount that our stockholders may receive in liquidating
distributions may be decreased.
Other
Risks
Our
rights and the rights of our stockholders to take action against
our directors and officers are limited, which could limit our
stockholders’ recourse in the event of actions not in our
stockholders’ best interests.
Our charter limits the liability of our directors and officers
to us and our stockholders for money damages, except for
liability resulting from:
| • | actual receipt of an improper benefit or profit in money, property or services; or | |
| • | a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated. |
In addition, our charter permits us to agree to indemnify our
present and former directors and officers for actions taken by
them in those capacities to the maximum extent permitted by
Maryland law. Our bylaws require us to indemnify each present or
former director or officer, to the maximum extent permitted by
Maryland law, in the defense of any proceeding to which he or
she is made, or threatened to be made, a party by reason of his
or her service to us. In addition, we may be obligated to fund
the defense costs incurred by our directors and officers.
Compliance
with our Investment Company Act exemption imposes limits on our
operations.
We conduct our operations so as not to become regulated as an
investment company under the Investment Company Act of 1940, as
amended (the “Investment Company Act”). We rely on an
exemption from registration under Section 3(c)(5)(C) of the
Investment Company Act, which generally means that at least 55%
of our portfolio must be comprised of qualifying real estate
assets and at least another 25% of our portfolio must be
comprised of additional qualifying real estate assets and real
estate-related assets.
Rapid
changes in the market value or income from our real
estate-related investments or non-qualifying assets may make it
more difficult for us to maintain our status as a REIT or
exemption from the Investment Company Act.
If the market value or income potential of real estate-related
investments declines as a result of a change in interest rates,
prepayment rates or other factors, we may need to increase our
real estate investments and income
and/or
liquidate our non-qualifying assets in order to maintain our
REIT status or exemption from the Investment Company Act. If the
decline in real estate asset values
and/or
the
decline in qualifying REIT income occur quickly, it may be
especially difficult to maintain REIT status. These risks may be
exacerbated by the illiquid nature of both real estate and
non-real estate assets that we may own. We may have to make
investment decisions that we would not make absent the REIT and
Investment Company Act considerations.
Liability
relating to environmental matters may decrease the value of the
underlying properties.
Under various federal, state and local laws, an owner or
operator of real property may become liable for the costs of
cleanup of certain hazardous substances released on or under its
property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for,
the release of such hazardous substances. The presence of
hazardous substances may adversely affect an owner’s
ability to sell real estate or borrow using real estate as
collateral. To the extent that an owner of an underlying
property becomes liable for
29
cleanup costs, the ability of the owner to make debt payments
may be reduced, which in turn may adversely affect the value of
the relevant mortgage asset held by us.
We are
highly dependent on information systems and systems failures
could significantly disrupt our business, which may, in turn,
negatively affect the market price of our common stock and our
ability to pay dividends.
We are highly dependent on information systems and systems
failures could significantly disrupt our business, which may, in
turn, negatively affect the market price of our common stock and
our ability to pay dividends.
Our business is highly dependent on the communications and
information systems of our Manager. Any failure or interruption
of our Manager’s systems could cause delays or other
problems in our securities trading activities, which could have
a material adverse effect on our operating results and
negatively affect the market price of our common stock and our
ability to pay dividends.
Terrorist
attacks and other acts of violence or war may affect the real
estate industry, our profitability and the market for our common
stock.
The terrorist attacks on September 11, 2001 disrupted the
U.S. financial markets, including the real estate capital
markets, and negatively impacted the U.S. economy in
general. Any future terrorist attacks, the anticipation of any
such attacks, the consequences of any military or other response
by the U.S. and its allies, and other armed conflicts could
cause consumer confidence and spending to decrease or result in
increased volatility in the United States and worldwide
financial markets and economy. The economic impact of any such
future events could also adversely affect the credit quality of
some of our loans and investments and the property underlying
our securities.
We may suffer losses as a result of the adverse impact of any
future attacks and these losses may adversely impact our
performance and revenues and may result in volatility of the
value of our securities. A prolonged economic slowdown, a
recession or declining real estate values could impair the
performance of our investments and harm our financial condition,
increase our funding costs, limit our access to the capital
markets or result in a decision by lenders not to extend credit
to us. We cannot predict the severity of the effect that
potential future terrorist attacks would have on our business.
Losses resulting from these types of events may not be fully
insurable.
In addition, the events of September 11 created significant
uncertainty regarding the ability of real estate owners of high
profile assets to obtain insurance coverage protecting against
terrorist attacks at commercially reasonable rates, if at all.
With the enactment of the Terrorism Risk Insurance Act of 2002,
or TRIA, and the subsequent enactment of the Terrorism Risk
Insurance Extension Act of 2005, which extended TRIA through the
end of 2007, insurers must make terrorism insurance available
under their property and casualty insurance policies, but this
legislation does not regulate the pricing of such insurance. The
absence of affordable insurance coverage may adversely affect
the general real estate lending market, lending volume and the
market’s overall liquidity and may reduce the number of
suitable investment opportunities available to us and the pace
at which we are able to make investments. If the properties in
which we invest are unable to obtain affordable insurance
coverage, the value of those investments could decline, and in
the event of an uninsured loss, we could lose all or a portion
of our investment.
Risks
Related to Conflicts of Interest and Our Relationship with Our
Manager
The
management agreement was not negotiated on an arms-length basis.
As a result, the terms, including fees payable, may not be as
favorable to us as if it was negotiated with an unaffiliated
third party.
The management agreement between Care and its Manager, CIT
Healthcare, was negotiated between related parties. As a result,
we did not have the benefit of arms-length negotiations of the
type normally conducted with an unaffiliated third party and the
terms, including fees payable, may not be as favorable to us as
if we did engage in negotiations with an unaffiliated third
party. We may choose not to enforce, or to enforce less
vigorously, our rights under the management agreement because of
our desire to maintain our ongoing relationship with our Manager.
30
Risks
Relating to the Healthcare Industry
Our
investments are expected to be concentrated in healthcare
facilities and healthcare-related assets, making us more
vulnerable economically than if our investments were more
diversified.
We own interests in healthcare facilities as well as provide
financing for healthcare businesses. A downturn in the
healthcare industry or the economy generally could negatively
affect our borrowers’ or tenants’ ability to make
payments to us and, consequently, our ability to meet debt
service obligations or make distributions to our stockholders.
These adverse effects could be more pronounced than if we
diversified our investments outside of healthcare facilities.
Furthermore, some of our tenants and borrowers in the healthcare
industry are heavily dependant on reimbursements from the
Medicare and Medicaid programs for the bulk of their revenues.
Our tenants’ and borrowers’ dependence on
reimbursement revenues could cause us to suffer losses in
several instances.
| • | If our tenants or borrowers fail to comply with operational covenants and other regulations imposed by these programs, they may lose their eligibility to continue to receive reimbursements under the programs or incur monetary penalties, either of which could result in the tenant’s or borrower’s inability to make scheduled payments to us. | |
| • | If reimbursement rates do not keep pace with increasing costs of services to eligible recipients, or funding levels decrease as a result of state budget crises or increasing pressures from Medicare and Medicaid to control healthcare costs, our tenants and borrowers may not be able to generate adequate revenues to satisfy their obligations to us. | |
| • | If a healthcare tenant or borrower were to default on its loan, we would be unable to invoke our rights to the pledged receivables directly as the law prohibits payment of amounts owed to healthcare providers under the Medicare and Medicaid programs to be directed to any entity other than the actual providers. Consequently, we would need a court order to force collection directly against these governmental payors. There is no assurance that we would be successful in obtaining this type of court order. |
The healthcare industry continues to face various challenges,
including increased government and private payor pressure on
healthcare providers to control or reduce costs, and increasing
competition for patients among healthcare providers in areas
with significant unused capacity. We believe that certain of our
tenants or borrowers will continue to experience a shift in
payor mix away from
fee-for-service
payors (if any), resulting in an increase in the percentage of
revenues attributable to managed care payors, government payors
and general industry trends that include pressures to control
healthcare costs. Pressures to control healthcare costs and a
shift away from traditional health insurance reimbursement have
resulted in an increase in the number of patients whose
healthcare coverage is provided under managed care plans, such
as health maintenance organizations and preferred provider
organizations. In addition, due to the aging of the population
and the expansion of governmental payor programs, we anticipate
that there will be a marked increase in the number of patients
reliant on healthcare coverage provided by governmental payors,
which in the case of skilled nursing facilities is already
significant. These changes could have a material adverse effect
on the financial condition of some or all of our tenants or
borrowers, which could have a material adverse effect on our
financial condition and results of operations and could
negatively affect our ability to make distributions to our
stockholders.
The
healthcare industry is heavily regulated and existing and new
laws or regulations, changes to existing laws or regulations,
loss of licensure or certification or failure to obtain
licensure or certification could result in the inability of our
borrowers or tenants to make payments to us.
The healthcare industry is highly regulated by federal, state
and local laws, and is directly affected by federal conditions
of participation, state licensing requirements, facility
inspections, state and federal reimbursement policies,
regulations concerning capital and other expenditures,
certification requirements and other such laws, regulations and
rules. In addition, establishment of healthcare facilities and
transfers of operations of healthcare facilities are subject to
regulatory approvals not required for establishment of or
transfers of other types of commercial operations and real
estate. Sanctions for failure to comply with these regulations
and laws include, but are not limited to, loss of or inability
to obtain licensure, fines and loss of or inability to obtain
certification to
31
participate in the Medicare and Medicaid programs, as well as
potential criminal penalties. The failure of a tenant or
borrower to comply with such laws, requirements and regulations
could affect its ability to establish or continue its operation
of the facility or facilities and could adversely affect the
tenant’s or borrower’s ability to make payments to us
which could have a material adverse effect on our financial
condition and results of operations and could negatively affect
our ability to make distributions to our stockholders. In
addition, restrictions and delays in transferring the operations
of healthcare facilities, in obtaining new third-party payor
contracts including Medicare and Medicaid provider agreements,
and in receiving licensure and certification approval from
appropriate state and federal agencies by new tenants may affect
the ability of our tenants or borrowers to make payments to us.
Furthermore, these matters may affect new tenants’ or
borrowers’ ability to obtain reimbursement for services
rendered, which could adversely affect the ability of our
tenants’ or borrowers’ to pay rent to us and to pay
principal and interest on their loans from us.
Our
tenants and borrowers are subject to fraud and abuse laws, the
violation of which by a tenant or borrower may jeopardize the
tenant’s or borrower’s ability to make payments to
us.
The federal government and numerous state governments have
passed laws and regulations that attempt to eliminate healthcare
fraud and abuse by prohibiting business arrangements that induce
patient referrals or the ordering of specific ancillary
services. In addition, the Balanced Budget Act of 1997
strengthened the federal fraud and abuse laws to provide for
stiffer penalties for violations. Violations of these laws may
result in the imposition of criminal and civil penalties,
including possible exclusion from federal and state healthcare
programs. Imposition of any of these penalties upon any of our
tenants or borrowers could jeopardize any tenant’s or
borrower’s ability to operate a facility or to make
payments, thereby potentially adversely affecting us.
In the past several years, federal and state governments have
significantly increased investigation and enforcement activity
to detect and eliminate fraud and abuse in the Medicare and
Medicaid programs. In addition, legislation and regulations have
been adopted at both state and federal levels, which severely
restricts the ability of physicians to refer patients to
entities in which they have a financial interest. It is
anticipated that the trend toward increased investigation and
enforcement activity in the area of fraud and abuse, as well as
self-referrals, will continue in future years and could
adversely affect our prospective tenants or borrowers and their
operations, and in turn their ability to make payments to us.
Operators
are faced with increased litigation and rising insurance costs
that may affect their ability to make their lease or mortgage
payments.
In some states, advocacy groups have been created to monitor the
quality of care at healthcare facilities, and these groups have
brought litigation against operators. Also, in several
instances, private litigation by patients has succeeded in
winning very large damage awards for alleged abuses. The effect
of this litigation and potential litigation has been to
materially increase the costs of monitoring and reporting
quality of care compliance incurred by operators. In addition,
the cost of liability and medical malpractice insurance has
increased and may continue to increase so long as the present
litigation environment affecting the operations of healthcare
facilities continues. Continued cost increases could cause our
operators to be unable to make their lease or mortgage payments,
potentially decreasing our revenue and increasing our collection
and litigation costs. Moreover, to the extent we are required to
take back the affected facilities, our revenue from those
facilities could be reduced or eliminated for an extended period
of time.
Transfers
of healthcare facilities generally require regulatory approvals,
and alternative uses of healthcare facilities are
limited.
Because transfers of healthcare facilities may be subject to
regulatory approvals not required for transfers of other types
of commercial operations and other types of real estate, there
may be delays in transferring operations of our facilities to
successor operators or we may be prohibited from transferring
operations to a successor operator. In addition, substantially
all of the properties that we may acquire or that will secure
our loans will be healthcare facilities that may not be easily
adapted to non-healthcare related uses. If we are unable to
transfer properties at times opportune to us, our revenue and
operations may suffer.
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Economic
crisis generally and its affect on state budgets could result in
a decrease in Medicare and Medicaid reimbursement
levels
The current economic crisis is having a widespread impact both
nationally and at the state level. Healthcare facilities are no
different that other businesses and are accordingly not immune
from the economic crisis’ impact. Specifically, revenues at
all healthcare or related facilities may be impacted as a result
of individuals forgoing or decreasing utilization of healthcare
services or delaying moves to independent living facilities,
assisted living facilities or nursing homes. Furthermore, the
federal government in the case of Medicare or the federal
matching portion of Medicaid may seek cost reductions in such
programs in order to shift federal moneys to pay for the
stimulus package or programs assisting the financial sector or
other businesses. Finally, many states are facing severe budget
short-falls and in some cases facing bankruptcy which could
result in a decrease in funding made available for the Medicaid
program and a decrease in reimbursement rates for nursing home
facilities and other healthcare facilities. To the extent that
there is a decrease in utilization of tenants’ healthcare
facilities or a reduction in funds available for the Medicare or
Medicaid programs, tenants may not have sufficient revenues to
pay rent to us or may be forced to discontinue operations. In
either case, our revenues and operations could be adversely
affected.
Risks
Related to Our Investments
Since
real estate investments are illiquid, we may not be able to sell
properties when we desire to do so.
Real estate investments generally cannot be sold quickly. We may
not be able to vary our owned real estate portfolio promptly in
response to changes in the real estate market. This inability to
respond to changes in the performance of our owned real estate
investments could adversely affect our ability to service our
debt. The real estate market is affected by many factors that
are beyond our control, including:
| • | adverse changes in national and local economic and market conditions; | |
| • | changes in interest rates and in the availability, costs and terms of financing; | |
| • | changes in governmental laws and regulations, fiscal policies and zoning and other ordinances and costs of compliance with laws and regulations; | |
| • | the ongoing need for capital improvements, particularly in older structures; | |
| • | changes in operating expenses; and | |
| • | civil unrest, acts of war and natural disasters, including earthquakes and floods, which may result in uninsured and underinsured losses. |
Because
of the unique and specific improvements required for healthcare
facilities, we may be required to incur substantial renovation
costs to make certain of our properties suitable for other
operators and tenants, which could materially adversely affect
our business, results of operations and financial
condition.
Healthcare facilities are typically highly customized and may
not be easily adapted to non-healthcare-related uses. The
improvements generally required to conform a property to
healthcare use, such as upgrading electrical, gas and plumbing
infrastructure, are costly and often times tenant-specific. A
new or replacement operator or tenant may require different
features in a property, depending on that operator’s or
tenant’s particular operations. If a current operator or
tenant is unable to pay rent and vacates a property, we may
incur substantial expenditures to modify a property for a new
tenant, or for multiple tenants with varying infrastructure
requirements, before we are able to re-lease the space to
another tenant. Consequently, our properties may not be suitable
for lease to traditional office or other healthcare tenants
without significant expenditures or renovations, which costs may
materially adversely affect our business, results of operations
and financial condition.
33
Our
use of joint ventures may limit our flexibility with jointly
owned investments and could adversely affect our business,
results of operations and financial condition, REIT status and
our ability to sell these joint venture interests.
We have invested in joint ventures with other persons or
entities when circumstances warrant the use of these structures.
We currently have two joint ventures that are not consolidated
with our financial statements. Our aggregate investments in
these joint ventures represented approximately 17.8% of our
total assets at December 31, 2009. Our participation in
joint ventures is subject to the risks that:
| • | we could experience an impasse on certain decisions because we do not have sole decision-making authority, which could require us to expend additional resources on resolving such impasses or potential disputes; | |
| • | our joint venture partners could have investment goals that are not consistent with our investment objectives, including the timing, terms and strategies for any investments; | |
| • | our joint venture partners might become bankrupt, fail to fund their share of required capital contributions or fail to fulfill their obligations as a joint venture partner, which may require us to infuse our own capital into the venture on behalf of the partner despite other competing uses for such capital; | |
| • | our joint venture partners may have competing interests in our markets that could create conflict of interest issues; | |
| • | income and assets owned through joint-venture entities may affect our ability to satisfy requirements related to maintaining our REIT status; | |
| • | any sale or other disposition of our interest in either joint venture may require lender consent, and we may not be able to obtain such consent or approval; | |
| • | such transaction may also trigger other contractual rights held by a joint venture partner, lender or other third party depending on how the proposed sale is structured; and | |
| • | there may be disagreements as to whether a consent and/or approval is required in connection with the consummation of a transaction with a joint venture partner, lender or other third party, or whether such a transaction triggers other contractual rights held by a joint venture partner, lender or other third party, and in either case, those disagreements may result in litigation. |
Preferred
equity investments involve a greater risk of loss than
conventional debt financing.
We have invested in preferred equity investments and may invest
in additional preferred equity investments. Our preferred equity
investments involve a higher degree of risk than conventional
debt financing due to a variety of factors, including that such
investments are subordinate to all of the issuer’s loans
and are not secured by property underlying the investment.
Furthermore, should the issuer default on our investment, we
would only be able to proceed against the entity in which we
have an interest, and not the property underlying our
investment. As a result, we may not recover some or all of our
investment.
Our
investments in debt securities are subject to specific risks
relating to the particular issuer of the securities and to the
general risks of investing in subordinated real estate
securities.
We hold debt securities of healthcare-related
issuers.
Our investments in debt securities
involve specific risks. Our investments in debt securities are
subject to risks that include:
| • | delinquency and foreclosure, and losses in the event thereof; | |
| • | the dependence upon the successful operation of and net income from real property; | |
| • | risks generally incident to interests in real property; and | |
| • | risks that may be presented by the type and use of a particular commercial property. |
34
Debt securities are generally unsecured and may also be
subordinated to other obligations of the issuer. We may also
invest in debt securities that are rated below investment grade.
As a result, investments in debt securities are also subject to
risks of:
| • | limited liquidity in the secondary trading market; | |
| • | substantial market price volatility resulting from changes in prevailing interest rates; | |
| • | subordination to the prior claims of banks and other senior lenders to the issuer; | |
| • | the operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause the issuer to reinvest premature redemption proceeds in lower yielding assets; | |
| • | the possibility that earnings of the debt security issuer may be insufficient to meet its debt service; and | |
| • | the declining creditworthiness and potential for insolvency of the issuer of such debt securities during periods of rising interest rates and economic downturn. |
These risks may adversely affect the value of outstanding debt
securities and the ability of the issuers thereof to repay
principal and interest.
Our
investments will be subject to risks particular to real
property.
Our loans are directly or indirectly secured by a lien on real
property (or the equity interests in an entity that owns real
property) that, upon the occurrence of a default on the loan,
could result in our acquiring ownership of the property.
Investments in real property or real property-related assets are
subject to varying degrees of risk. The value of each property
is affected significantly by its ability to generate cash flow
and net income, which in turn depends on the amount of rental or
other income that can be generated net of expenses required to
be incurred with respect to the property. The rental or other
income from these properties may be adversely affected by a
number of risks, including:
| • | acts of God, including hurricanes, earthquakes, floods and other natural disasters, which may result in uninsured losses; | |
| • | acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001; | |
| • | adverse changes in national and local economic and real estate conditions (including business layoffs or downsizing, industry slowdowns, changing demographics); | |
| • | an oversupply of (or a reduction in demand for) space in properties in geographic areas where our investments are concentrated and the attractiveness of particular properties to prospective tenants; | |
| • | changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance therewith and the potential for liability under applicable laws; and | |
| • | costs of remediation and liabilities associated with environmental conditions such as indoor mold; and the potential for uninsured or underinsured property losses. |
Many expenditures associated with properties (such as operating
expenses and capital expenditures) cannot be reduced when there
is a reduction in income from the properties. Adverse changes in
these factors may have a material adverse effect on the ability
of our borrowers to pay their loans, as well as on the value
that we can realize from properties we own or acquire, and may
reduce or eliminate our ability to make distributions to
stockholders.
The
bankruptcy, insolvency or financial deterioration of our
facility operators could significantly delay our ability to
collect unpaid rents or require us to find new
operators.
Our financial position and our ability to make distributions to
our stockholders may be adversely affected by financial
difficulties experienced by any of our major operators,
including bankruptcy, insolvency or a general downturn in the
business, or in the event any of our major operators do not
renew or extend their relationship with us as their lease terms
expire.
35
The healthcare industry is highly competitive and we expect that
it may become more competitive in the future. Our operators are
subject to competition from other healthcare providers that
provide similar services. The profitability of healthcare
facilities depends upon several factors, including the number of
physicians using the healthcare facilities or referring patients
there, competitive systems of healthcare delivery and the size
and composition of the population in the surrounding area.
Private, federal and state payment programs and the effect of
other laws and regulations may also have a significant influence
on the revenues and income of the properties. If our operators
are not competitive with other healthcare providers and are
unable to generate income, they may be unable to make rent and
loan payments to us, which could adversely affect our cash flow
and financial performance and condition.
We are exposed to the risk that our operators may not be able to
meet their obligations, which may result in their bankruptcy or
insolvency. The bankruptcy laws afford certain rights to a party
that has filed for bankruptcy or reorganization and the right to
terminate an investment, evict an operator, demand immediate
repayment and other remedies under our leases and loans may not
protect us. An operator in bankruptcy may be able to restrict
our ability to collect unpaid rents or interest during the
bankruptcy proceeding.
Volatility
of values of commercial properties may adversely affect our
loans and investments.
Commercial property values and net operating income derived from
such properties are subject to volatility and may be affected
adversely by a number of factors, including, but not limited to,
national, regional and local economic conditions (which may be
affected adversely by industry slowdowns and other factors);
changes or continued weakness in specific industry segments;
construction quality, age and design; demographics; retroactive
changes to building or similar codes; and increases in operating
expenses (such as energy costs). In the event a property’s
net operating income decreases, a borrower may have difficulty
repaying our loan, which could result in losses to us. In
addition, decreases in property values reduce the value of the
collateral and the potential proceeds available to a borrower to
repay our loans, which could also cause us to suffer losses.
Insurance
on the real estate underlying our investments may not cover all
losses.
There are certain types of losses, generally of a catastrophic
nature, such as earthquakes, floods, hurricanes, terrorism or
acts of war that may be uninsurable or not economically
insurable. Inflation, changes in building codes and ordinances,
environmental considerations and other factors, including
terrorism or acts of war, also might make the insurance proceeds
insufficient to repair or replace a property if it is damaged or
destroyed. Under such circumstances, the insurance proceeds
received might not be adequate to restore our economic position
with respect to the affected real property. Any uninsured loss
could result in both loss of cash flow from and the asset value
of the affected property.
Our
due diligence may not reveal all of a borrower’s
liabilities and may not reveal other weaknesses in its
business.
Before investing in a company or making a loan to a borrower, we
assess the strength and skills of such entity’s management
and other factors that we believe are material to the
performance of the investment. In making the assessment and
otherwise conducting customary due diligence, we rely on the
resources available to us and, in some cases, an investigation
by third parties. This process is particularly important and
subjective with respect to newly organized entities because
there may be little or no information publicly available about
the entities. There can be no assurance that our due diligence
processes have uncovered all relevant facts or that any
investment will be successful.
Interest
rate fluctuations may adversely affect the value of our assets,
net income and common stock.
Interest rates are highly sensitive to many factors beyond our
control, including governmental monetary and tax policies,
domestic and international economic and political considerations
and other factors beyond our control. Interest rate fluctuations
present a variety of risks, including the risk of a mismatch
between asset yields and borrowing rates, variances in the yield
curve and fluctuating prepayment rates and may adversely affect
our income and value of our common stock.
36
Our portfolio of mortgage loans is comprised of variable rate
instruments, each of which bears interest at a stated spread
over one-month LIBOR and is funded principally by equity. In
periods of declining interest rates, our interest income on
loans will be adversely affected. The REIT provisions of the
Internal Revenue Code exclude income on asset hedges from
qualifying as income derived from real estate activities.
Accordingly, our ability to hedge interest rate risk on a
portfolio of assets funded principally by equity is limited.
Prepayment
rates can increase, adversely affecting yields.
The value of our assets may be affected by prepayment rates on
mortgage loans. Prepayment rates on loans are influenced by
changes in current interest rates on adjustable-rate and
fixed-rate mortgage loans and a variety of economic, geographic
and other factors beyond our control. Consequently, such
prepayment rates cannot be predicted with certainty and no
strategy can completely insulate us from prepayment or other
such risks. In periods of declining interest rates, prepayments
on loans generally increase. If general interest rates decline
as well, the proceeds of such prepayments received during such
periods are likely to be reinvested by us in assets yielding
less than the yields on the assets that were prepaid. In
addition, the market value of the assets may, because of the
risk of prepayment, benefit less than other fixed income
securities from declining interest rates. Under certain interest
rate and prepayment scenarios we may fail to recoup fully our
cost of acquisition of certain investments. A portion of our
investments require payments of prepayment fees upon prepayment
or maturity of the investment. We may not be able to structure
future investments that contain similar prepayment penalties.
Some of our assets may not have prepayment protection.
The
lack of liquidity in our investments may harm our
business.
We may, subject to maintaining our REIT qualification and our
exemption from regulation under the Investment Company Act, make
investments in securities that are not publicly traded. These
securities may be subject to legal and other restrictions on
resale or will otherwise be less liquid than publicly traded
securities. The illiquidity of our investments may make it
difficult for us to sell such investments if the need arises.
Federal
Income Tax Risks
Loss
of our status as a REIT would have significant adverse
consequences to us and the value of our common
stock.
If we lose our status as a REIT, we will face serious tax
consequences that may substantially reduce the funds available
for satisfying our obligations and for distribution to our
stockholders for each of the years involved because:
| • | We would be subject to federal income tax as a regular corporation and could face substantial tax liability; | |
| • | We would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates; | |
| • | We also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; | |
| • | Corporate subsidiaries could be treated as separate taxable corporations for U.S. federal income tax purposes; | |
| • | Any resulting corporate tax liability could be substantial and could reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of, and trading prices for, our common stock; and | |
| • | Unless we are entitled to relief under statutory provisions, we will not be able to elect REIT status for four taxable years following the year during which we were disqualified. |
In addition, if we fail to qualify as a REIT, all distributions
to stockholders would continue to be treated as dividends to the
extent of our current and accumulated earning and profits,
although corporate stockholders may be eligible for the
dividends received deduction and individual stockholders may be
eligible for taxation at the rates
37
generally applicable to long-term capital gains (currently at a
maximum rate of 15%) with respect to dividend distributions. We
would no longer be required to pay dividends to maintain REIT
status.
Our ability to satisfy certain REIT qualification tests depends
upon our analysis of the characterization and fair market values
of our assets, some of which are not susceptible to a precise
determination, and for which we will not obtain independent
appraisals. Our compliance with the REIT income and quarterly
asset requirements also depends upon our ability to successfully
manage the composition of our income and assets on an ongoing
basis. Moreover, the proper classification of an instrument as
debt or equity for federal income tax purposes and the tax
treatment of participation interests that we hold in mortgage
loans and may be uncertain in some circumstances, which could
affect the application of the REIT qualification requirements as
described below. Accordingly, there can be no assurance that the
IRS will not contend that our interests in subsidiaries or other
issuers will not cause a violation of the REIT requirements.
Furthermore, as a result of these factors, our failure to
qualify as a REIT also could impair our ability to implement our
business strategy. Although we believe that we qualify as a
REIT, we cannot assure our stockholders that we will continue to
qualify or remain qualified as a REIT for tax purposes.
The
90% distribution requirement under the REIT tax rules will
decrease our liquidity and may force us to engage in
transactions that may not be consistent with our business
plan.
To comply with the 90% REIT taxable income distribution
requirement applicable to REITs and to avoid a nondeductible 4%
excise tax if the actual amount that we pay out to our
stockholders in a calendar year is less than a minimum amount
specified under federal tax laws, we must make distributions to
our stockholders. For distributions with respect to taxable
years ending on or before December 31, 2009, recent
Internal Revenue Service guidance allows us to satisfy up to 90%
of these requirements through the distribution of shares of Care
common stock, if certain conditions are met. Although we
anticipate that we generally will have sufficient cash or liquid
assets to enable us to satisfy the REIT distribution
requirement, it is possible that, from time to time, we may not
have sufficient cash or other liquid assets to meet the 90%
distribution requirement or we may decide to retain cash or
distribute such greater amount as may be necessary to avoid
income and excise taxation. This may be due to the timing
differences between the actual receipt of income and actual
payment of deductible expenses, on the one hand, and the
inclusion of that income and deduction of those expenses in
arriving at our taxable income, on the other hand. In addition,
non-deductible expenses such as principal amortization or
repayments or capital expenditures in excess of non-cash
deductions also may cause us to fail to have sufficient cash or
liquid assets to enable us to satisfy the 90% distribution
requirement.
In the event that timing differences occur or we deem it
appropriate to retain cash, we may borrow funds, issue
additional equity securities (although we cannot assure our
stockholders that we will be able to do so), pay taxable stock
dividends, if possible, distribute other property or securities
or engage in a transaction intended to enable us to meet the
REIT distribution requirements. This may require us to raise
additional capital to meet our obligations. Taking such action
may not be consistent with our business plan, may increase our
costs and may limit our ability to grow.
Qualifying
as a REIT involves highly technical and complex provisions of
the Internal Revenue Code.
Qualification as a REIT involves the application of highly
technical and complex Code provisions for which there are only
limited judicial and administrative interpretations. The
determination of various factual matters and circumstances not
entirely within our control may affect our ability to remain
qualified as a REIT. Our continued qualification as a REIT will
depend on our satisfaction of certain asset, income,
organizational, distribution, stockholder ownership and other
requirements on a continuing basis. In addition, our ability to
satisfy the requirements to qualify as a REIT depends in part on
the actions of third parties over which we have no control or
only limited influence, including in cases where we own an
equity interest in an entity that is classified as a partnership
for U.S. federal income tax purposes.
38
New
legislation or administrative or judicial action, in each
instance potentially with retroactive effect, could make it more
difficult or impossible for us to qualify as a
REIT.
The present federal income tax treatment of REITs may be
modified, possibly with retroactive effect, by legislative,
judicial or administrative action at any time, which could
affect the federal income tax treatment of an investment in us.
The federal income tax rules that affect REITs constantly are
under review by persons involved in the legislative process, the
IRS and the U.S. Treasury Department, which results in
statutory changes as well as frequent revisions to regulations
and interpretations.
On July 30, 2008, the Housing and Economic Recovery Tax Act
of 2008 (the “2008 Act”) was enacted into law. The
2008 Act’s sections that affect the REIT provisions of the
Code are generally effective for taxable years beginning after
its date of enactment, and for us will generally mean that the
new provisions apply from and after January 1, 2009, except
as otherwise indicated below.
The 2008 Act made the following changes to, or clarifications
of, the REIT provisions of the Code that could be relevant for
us:
| • | Taxable REIT Subsidiaries. The limit on the value of taxable REIT subsidiaries’ securities held by a REIT has been increased from 20% to 25% of the total value of such REIT’s assets. | |
| • | Rental Income from a TRS. A REIT is generally limited in its ability to earn qualifying rental income from a TRS. The 2008 Act permits a REIT to earn qualifying rental income from the lease of a qualified healthcare property to a TRS if an eligible independent contractor operates the property. | |
| • | Expanded Prohibited Transactions Safe Harbor. The safe harbor from the prohibited transactions tax for certain sales of real estate assets is expanded by reducing the required minimum holding period from four years to two years, among other changes. | |
| • | Hedging Income. Income from a hedging transaction entered into after July 30, 2008, that complies with identification procedures set out in U.S. Treasury Regulations and hedges indebtedness incurred or to be incurred by us to acquire or carry real estate assets will not constitute gross income for purposes of both the 75% and 95% gross income tests. | |
| • | Reclassification Authority. The Secretary of the Treasury is given broad authority to determine whether particular items of gain or income recognized after July 30, 2008, qualify or not under the 75% and 95% gross income tests, or are to be excluded from the measure of gross income for such purposes. |
Revisions in federal tax laws and interpretations thereof could
cause us to change our investments and commitments and affect
the tax consequences of an investment in us.
Dividends
payable by REITs do not qualify for the reduced tax rates
available for some dividends.
The maximum tax rate applicable to income from “qualified
dividends” payable to domestic stockholders that are
individuals, trusts and estates has been reduced by legislation
to 15% through the end of 2010. Dividends payable by REITs,
however, generally are not eligible for the reduced rates.
Although this legislation does not adversely affect the taxation
of REITs or dividends payable by REITs, the more favorable rates
applicable to regular corporate qualified dividends could cause
investors who are individuals, trusts and estates to perceive
investments in REITs to be relatively less attractive than
investments in the stocks of non-REIT corporations that pay
dividends, which could adversely affect the value of the stock
of REITs, including our common stock.
The
stock ownership limit imposed by the Internal Revenue Code for
REITs and our charter may restrict our business combination
opportunities.
To qualify as a REIT under the Code, not more than 50% in value
of our outstanding stock may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Internal Revenue
Code to include certain entities) at any time during the last
half of each taxable year after our first year in which we
qualify as a REIT. Our charter, with certain exceptions,
authorizes our board of directors to take the actions that are
necessary and desirable to preserve our qualification as a REIT.
Unless an exemption is granted by our board of directors, no
person (as
39
defined to include entities) may own more than 9.8% in value or
in number of shares, whichever is more restrictive, of our
common or capital stock. In addition, our charter generally
prohibits beneficial or constructive ownership of shares of our
capital stock by any person that owns, actually or
constructively, an interest in any of our tenants that would
cause us to own, actually or constructively, more than a 9.9%
interest in any of our tenants. Our board of directors may grant
an exemption in its sole discretion, subject to such conditions,
representations and undertakings as it may determine. Our board
of directors has granted a limited exemption from the ownership
limitation to CIT Holding, our Manager, CIT, GoldenTree Asset
Management LP and SAB Capital Management, L.P. but only to
the extent that their ownership of our stock could not
reasonably be expected to cause us to violate the REIT
requirements (in which case they either would be required to
sell some of our stock or would become subject to the excess
share provisions of our charter, in each case to the extent
necessary to enable us to satisfy the REIT requirements). In
connection with the Tiptree transaction, our Board of Directors
has also granted an exemption to Tiptree from the ownership
limitations in our charter.
These ownership limitations in our charter are common in REIT
charters and are intended to assist us in complying with the tax
law requirements and to minimize administrative burdens.
However, these ownership limits might also delay or prevent a
transaction or a change in our control that might involve a
premium price for our common stock or otherwise be in the best
interest of our stockholders.
Even
if we remain qualified as a REIT, we may face other tax
liabilities that reduce our cash flow.
Even if we remain qualified for taxation as a REIT, we may be
subject to certain federal, state and local taxes on our income
and assets, including taxes on any undistributed income, tax on
income from some activities conducted as a result of a
foreclosure, and state or local income, property and transfer
taxes, including mortgage recording taxes. In addition, in order
to meet the REIT qualification requirements, or to avert the
imposition of a 100% tax that applies to certain gains derived
by a REIT from dealer property or inventory, we may hold some of
our non-healthcare assets through taxable REIT subsidiaries, or
TRSs, or other subsidiary corporations that will be subject to
corporate-level income tax at regular rates. We will be subject
to a 100% penalty tax on certain amounts if the economic
arrangements among our tenants, our TRS and us are not
comparable to similar arrangements among unrelated parties. Any
of these taxes would decrease cash available for distribution to
our stockholders. We currently do not have any TRSs.
Complying
with REIT requirements may cause us to forgo otherwise
attractive opportunities.
To qualify as a REIT for federal income tax purposes, we
continually must satisfy tests concerning, among other things,
the sources of our income, the nature and diversification of our
assets, the amounts we distribute to our stockholders and the
ownership of our stock. We may be unable to pursue investments
that would be otherwise advantageous to us in order to satisfy
the
source-of-income,
asset-diversification or distribution requirements for
maintaining our status as a REIT. Thus, compliance with the REIT
requirements may hinder our ability to make certain attractive
investments.
Complying
with REIT requirements may force us to liquidate otherwise
attractive investments.
To qualify as a REIT for federal income tax purposes, we must
ensure that at the end of each calendar quarter, at least 75% of
the value of our assets consists of cash, cash items, government
securities and qualified REIT real estate assets, including
certain mortgage loans and mortgage backed securities. The
remainder of our investment in securities (other than government
securities and qualified real estate assets) generally cannot
include more than 10% of the outstanding voting securities of
any one issuer or more than 10% of the total value of the
outstanding securities of any one issuer. In addition, in
general, no more than 5% of the value of our assets (other than
government securities and qualified real estate assets) can
consist of the securities of any one issuer, and no more than
20% of the value of our total securities can be represented by
securities of one or more TRSs (25% beginning in 2009). If we
fail to comply with these requirements at the end of any
calendar quarter, we must correct the failure within
30 days after the end of the calendar quarter or qualify
for certain statutory relief provisions to avoid losing our REIT
status, otherwise, we will suffer adverse tax consequences. As a
result, we may be required to liquidate from our portfolio
otherwise attractive investments. These actions could have the
effect of reducing our income and amounts available for
distribution to our stockholders.
40
Pursuing
the plan of liquidation may cause us to be subject to federal
income tax, which would reduce the amount of our liquidating
distributions.
We generally are not subject to federal income tax to the extent
that we distribute to our stockholders during each taxable year
(or, under certain circumstances, during the subsequent taxable
year) dividends equal to our taxable income for the year.
However, we are subject to federal income tax to the extent that
our taxable income exceeds the amount of dividends paid to our
stockholders for the taxable year. In addition, we are subject
to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions paid by us with respect to any calendar
year are less than the sum of 85% of our ordinary income for
that year, plus 95% of our capital gain net income for that
year, plus 100% of our undistributed taxable income from prior
years. While we intend to make distributions to our stockholders
sufficient to avoid the imposition of any federal income tax on
our taxable income and the imposition of the excise tax,
differences in timing between the actual receipt of income and
actual payment of deductible expenses, and the inclusion of such
income and deduction of such expenses in arriving at our taxable
income, could cause us to have to either borrow funds on a
short-term basis to meet the REIT distribution requirements,
find another alternative for meeting the REIT distribution
requirements, or pay federal income and excise taxes. The cost
of borrowing or the payment of federal income and excise taxes
would reduce the funds available for distribution to our
stockholders.
Complying
with REIT requirements may limit our ability to hedge
effectively.
The REIT provisions of the Internal Revenue Code substantially
limit our ability to hedge our liabilities. Any income from a
hedging transaction we enter into to manage risk of interest
rate changes or currency fluctuations with respect to borrowings
made or to be made to acquire or carry real estate assets does
not constitute “gross income” for purposes of the 95%
or, with respect to transactions entered into after
July 30, 2008, the 75% gross income test, provided that
certain requirements are met. To the extent that we enter into
other types of hedging transactions, the income from those
transactions is likely to be treated as non-qualifying income
for purposes of both of the gross income tests. As a result, we
might have to limit our use of advantageous hedging techniques
or implement those hedges through one of our domestic TRSs. This
could increase the cost of our hedging activities because our
domestic TRSs would be subject to tax on gains or expose us to
greater risks associated with changes in interest rates than we
would otherwise want to bear.
The
tax on prohibited transactions will limit our ability to engage
in transactions that would be treated as sales for federal
income tax purposes.
A REIT’s net income from prohibited transactions is subject
to a 100% tax. In general, prohibited transactions are sales or
other dispositions of property, other than foreclosure property,
but including mortgage loans, that are held primarily for sale
to customers in the ordinary course of our business. We might be
subject to this tax if we were to syndicate or dispose of loans
in a manner that was treated as a sale of the loans for federal
income tax purposes. Therefore, to avoid the prohibited
transactions tax, we may choose not to engage in certain sales
of loans at the REIT level, even though the sales otherwise
might be beneficial to us.
| ITEM 1B. | Unresolved Staff Comments |
None.
| ITEM 2. | Properties |
We do not own or lease any corporate property and occupy office
space owned or leased by our Manager and CIT. Our corporate
offices are located in midtown Manhattan at 505 Fifth
Avenue, New York, NY 10017. Correspondence should be addressed
to the attention of our Manager, CIT Healthcare LLC. We can be
contacted at
(212) 771-0505.
In addition, our Manager has operations in Livingston, NJ; and
Wayne, PA, which provide us certain services.
41
| ITEM 3. | Legal Proceedings |
On September 18, 2007, a class action complaint for
violations of federal securities laws was filed in the United
States District Court, Southern District of New York alleging
that the Registration Statement relating to the initial public
offering of shares of our common stock, filed on June 21,
2007, failed to disclose that certain of the assets in the
contributed portfolio were materially impaired and overvalued
and that we were experiencing increasing difficulty in securing
our warehouse financing lines. On January 18, 2008, the
court entered an order appointing co-lead plaintiffs and co-lead
counsel. On February 19, 2008, the co-lead plaintiffs filed
an amended complaint citing additional evidentiary support for
the allegations in the complaint. We believe the complaint and
allegations are without merit and intend to defend against the
complaint and allegations vigorously. We filed a motion to
dismiss the complaint on April 22, 2008. The plaintiffs
filed an opposition to our motion to dismiss on July 9,
2008, to which we filed our reply on September 10, 2008. On
March 4, 2009, the court denied our motion to dismiss. We
filed our answer on April 15, 2009. At a conference held on
May 15, 2009, the Court ordered the parties to make a joint
submission (the “Joint Statement”) setting forth:
(i) the specific statements that the plaintiffs’ claim
are false and misleading; (ii) the facts on which the
plaintiffs rely as showing each alleged misstatement was false
and misleading; and (iii) the facts on which the defendants
rely as showing those statements were true. The parties filed
the Joint Statement on June 3, 2009. On July 31, 2009,
the parties entered into a stipulation that narrowed the scope
of the proceeding to the single issue of the warehouse financing
disclosure in the Registration Statement.
On December 7, 2009, the Court ordered the parties to file
an abbreviated joint pre-trial statement on April 7, 2010.
The Court scheduled a pre-trial conference for April 9,
2010, at which the Court will determine based on the joint
pre-trial statement whether to permit us and the other
defendants to file a summary judgment motion. The outcome of
this matter cannot currently be predicted. To date, Care has
incurred approximately $1.0 million to defend against this
complaint and any incremental costs to defend will be paid by
Care’s insurer. No provision for loss related to this
matter has been accrued at December 31, 2009.
On November 25, 2009, we filed a lawsuit in the
U.S. District Court for the Northern District of Texas
against Mr. Jean-Claude Saada and 13 of his companies (the
“Saada Parties”), seeking declaratory judgments
construing certain contracts among the parties and also seeking
tort damages against the Saada Parties for tortious interference
with prospective contractual relations and breach of the duty of
good faith and fair dealing. On January 27, 2010, the Saada
Parties answered our complaint, and simultaneously filed
counterclaims and a third-party complaint (the
“Counterclaims”) that named our subsidiaries ERC Sub
LLC and ERC Sub, L.P., external manager CIT Healthcare LLC, and
Board Chairman Flint D. Besecker, as additional third-party
defendants. The Counterclaims seek four declaratory judgments
construing certain contracts among the parties that are
basically the mirror image of our declaratory judgment claims.
In addition, the Counterclaims also seek monetary damages for
purported breaches of fiduciary duty and the duty of good faith
and fair dealing, as well as fraudulent inducement, against us
and the third-party defendants jointly and severally. The
Counterclaims further request indemnification by ERC Sub, L.P.,
pursuant to a contract between the parties, and the imposition
of a “constructive trust” on the proceeds of any
future liquidation of Care, to ensure a reservoir of funds from
which any liability to the Saada Parties could be paid. Although
the Counterclaims do not itemize their asserted damages, they
assign these damages a value of $100 million “or
more.” In response to the Counterclaims, Care and the
third-party defendants filed on March 5, 2010, an omnibus
motion to dismiss all of the Counterclaims. The outcome of this
matter cannot currently be predicted. To date, Care has incurred
approximately $0.2 million to defend against this
complaint. No provision for loss related to this matter has been
accrued at December 31, 2009.
Care is not presently involved in any other material litigation
nor, to our knowledge, is any material litigation threatened
against us or our investments, other than routine litigation
arising in the ordinary course of business. Management believes
the costs, if any, incurred by us related to litigation will not
materially affect our financial position, operating results or
liquidity.
42
| ITEM 5. | Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |
Shares of our common stock began trading on The New York Stock
Exchange on June 22, 2007 under the symbol “CRE”.
As of March 9, 2010, there were 16 shareholders of
record and approximately 1,300 beneficial owners.
The following table sets forth the high and low closing sales
prices per share of our common stock and the distributions
declared and paid per share on our common stock for the periods
indicated:
|
Dividends
|
Dividends
|
|||||||||||||||
| 2007 | High | Low | Declared | Paid | ||||||||||||
|
June 22 (commencement of operations) to June 30
|
$ | 13.76 | $ | 13.50 | — | — | ||||||||||
|
Third Quarter
|
$ | 14.93 | $ | 10.31 | $ | — | $ | — | ||||||||
|
Fourth Quarter
|
$ | 11.99 | $ | 9.73 | $ | 0.17 | $ | 0.17 | ||||||||
|
2008
|
||||||||||||||||
|
First Quarter
|
$ | 12.23 | $ | 10.08 | $ | 0.17 | $ | 0.17 | ||||||||
|
Second Quarter
|
$ | 11.50 | $ | 9.43 | $ | 0.17 | $ | 0.17 | ||||||||
|
Third Quarter
|
$ | 12.00 | $ | 8.80 | $ | 0.17 | $ | 0.17 | ||||||||
|
Fourth Quarter
|
$ | 11.61 | $ | 6.85 | $ | 0.17 | $ | 0.17 | ||||||||
|
2009
|
||||||||||||||||
|
First Quarter
|
$ | 9.30 | $ | 4.02 | $ | 0.17 | — | |||||||||
|
Second Quarter
|
$ | 6.33 | $ | 4.90 | $ | 0.17 | $ | 0.17 | ||||||||
|
Third Quarter
|
$ | 8.11 | $ | 5.02 | $ | 0.17 | $ | 0.34 | ||||||||
|
Fourth Quarter
|
$ | 8.55 | $ | 7.05 | $ | 0.17 | $ | 0.17 | ||||||||
On March 12, 2010, the closing sales price of our common
stock was $8.38 per share. Future distributions will be declared
and paid at the discretion of the board of directors. See
ITEM 7. “
Management’s Discussion and Analysis
of Financial Condition and Results of Operations —
Dividends
” for additional information regarding our
dividends.
On October 22, 2008, we announced that the board of
directors authorized the purchase, from time to time, of up to
2,000,000 shares of our common stock. On November 25,
2008, we repurchased 1,000,000 shares of our common stock
from GoldenTree Asset Management LP at $8.33 per share and also
paid GoldenTree the dividend of $0.17 per share declared for the
third quarter of 2008.
43
The graph below compares the cumulative total return of Care and
the S&P 500 and the Dow Jones REIT Index and Equity REIT
Index from June 22, 2007 (commencement of operations) to
December 31, 2009. Total return assumes quarterly
reinvestment of dividends before consideration of income taxes.
INDEXED
RETURNS
|
Base
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Period
|
Quarter Ending
|
|||||||||||||||||||||||||||||||||||||||||||||||
| Company/Index | 6/22/07 | 6/30/07 | 9/30/07 | 12/31/07 | 3/31/08 | 6/30/08 | 9/30/08 | 12/31/08 | 3/31/09 | 6/30/09 | 9/30/09 | 12/31/09 | ||||||||||||||||||||||||||||||||||||
|
Care Investment Trust Inc.
|
100 | 101.85 | 88.74 | 80.91 | 80.75 | 73.24 | 90.55 | 62.65 | 40.44 | 38.52 | 56.81 | 57.78 | ||||||||||||||||||||||||||||||||||||
|
S&P Index
|
100 | 100.05 | 102.08 | 98.68 | 89.36 | 86.93 | 79.65 | 62.17 | 53.10 | 61.18 | 70.35 | 74.97 | ||||||||||||||||||||||||||||||||||||
|
Dow Jones Equity REIT Index
|
100 | 99.18 | 101.74 | 88.85 | 90.09 | 77.85 | 90.41 | 55.33 | 33.99 | 42.57 | 55.40 | 60.24 | ||||||||||||||||||||||||||||||||||||
|
Dow Jones REIT Index
|
100 | 94.69 | 68.04 | 68.21 | 53.65 | 81.69 | 47.07 | 46.86 | 34.28 | 43.47 | 57.23 | 63.04 | ||||||||||||||||||||||||||||||||||||
44
| ITEM 6. | Selected Financial Data |
Set forth below is our selected financial data for the years
ended December 31, 2009, December 31, 2008 and for the
period June 22, 2007 (commencement of operations) to
December 31, 2007. This information should be read in
conjunction with ITEM 7 —
“
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
.”
Operating
Data
|
For the Period
|
||||||||||||||||
|
For the
|
For the
|
June 22, 2007
|
||||||||||||||
|
Year Ended
|
Year Ended
|
(Commencement
|
||||||||||||||
|
December 31,
|
December 31,
|
of Operations) to
|
||||||||||||||
| (In thousands, except share and per share data) | 2009 | 2008 | December 31, 2007 | |||||||||||||
|
Total revenues
|
$ | 20,009 | $ | 22,259 | $ | 12,163 | ||||||||||
|
Operating
expenses
(1)(2)
|
12,153 | 44,271 | 14,339 | |||||||||||||
|
Other income (loss)
|
||||||||||||||||
|
Interest expense
|
6,510 | 4,521 | 134 | |||||||||||||
|
Loss from partially-owned entities
|
4,397 | 4,431 | — | |||||||||||||
|
Net
loss
(2)
|
$ | (2,826 | ) | $ | (30,806 | ) | $ | (1,557 | ) | |||||||
|
Net loss per share – basic and diluted
|
$ | (0.14 | ) | $ | (1.47 | ) | $ | (0.07 | ) | |||||||
|
Cash dividends paid per share
|
$ | 0.68 | $ | 0.68 | $ | 0.17 | ||||||||||
Balance
Sheet Data
|
As of
|
As of
|
As of
|
||||||||||
|
December 31,
|
December 31,
|
December 31,
|
||||||||||
| (In thousands) | 2009 | 2008 | 2007 | |||||||||
|
Loans held for investment
|
$ | — | $ | — | $ | 236,833 | ||||||
|
Investments in loans held at LOCOM
|
25,325 | 159,916 | — | |||||||||
|
Investment in real estate, net
|
101,539 | 105,130 | — | |||||||||
|
Investments in partially-owned entities
|
56,078 | 64,890 | 72,353 | |||||||||
|
Total assets
|
315,432 | 370,906 | 328,398 | |||||||||
|
Borrowings under warehouse line of credit
|
— | 37,781 | 25,000 | |||||||||
|
Mortgage notes payable
|
81,873 | 82,217 | — | |||||||||
|
Total liabilities
|
88,639 | 129,774 | 35,063 | |||||||||
|
Stockholders’ equity
|
226,793 | 241,132 | 293,335 | |||||||||
45
Other
Data
|
For the Period
|
||||||||||||
|
For the
|
For the
|
June 22, 2007
|
||||||||||
|
Year Ended
|
Year Ended
|
(Commencement
|
||||||||||
|
December 31,
|
December 31,
|
of Operations) to
|
||||||||||
| (In thousands, except per share data) | 2009 | 2008 | December 31, 2007 | |||||||||
|
Funds from
Operations
(3)
|
$ | 10,188 | $ | (19,832 | ) | $ | (1,557 | ) | ||||
|
Funds from Operations per share
|
$ | 0.51 | $ | (0.95 | ) | $ | (0.07 | ) | ||||
|
Adjusted Funds from
Operations
(3)
|
$ | 6,183 | $ | 4,560 | $ | 7,902 | ||||||
|
Adjusted Funds from Operations per share — basic and
diluted
|
$ | 0.31 | $ | 0.22 | $ | 0.38 | ||||||
| (1) | For 2007, includes $9,115 in stock-based compensation related to 607,690 shares granted to Care’s Manager, CIT Healthcare LLC, upon completion of Care’s initial public offering of its common stock which vested immediately. | |
| (2) | For 2008, includes a $29,327 charge related to the valuation allowance on our loans held at LOCOM | |
| (3) | Funds from Operations (FFO) and Available Funds from Operations (AFFO) are non-GAAP financial measures of REIT performance. See ITEM 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures” for additional information. |
See discussion of a material uncertainty regarding Cambridge
litigation in Item 3 Legal Proceedings.
| ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following should be read in conjunction with the
consolidated financial statements and notes included herein.
This “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” contains
certain non-GAAP financial measures. See
“Non-GAAP Financial Measures” and supporting
schedules for reconciliation of our non-GAAP financial measures
to the comparable GAAP financial measures.
Overview
Care Investment Trust Inc. (all references to
“Care”, “the Company”, “we”,
“us”, and “our” means Care Investment
Trust Inc. and its subsidiaries) is an externally managed
real estate investment trust (“REIT”) formed to invest
in healthcare-related real estate and mortgage debt. Care was
incorporated in Maryland in March 2007, and we completed our
initial public offering on June 22, 2007. We were
originally positioned to make mortgage investments in
healthcare-related properties, and to opportunistically invest
in real estate through utilizing the origination platform of our
external manager, CIT Healthcare LLC (“CIT Healthcare”
or our “Manager”). We acquired our initial portfolio
of mortgage loan assets from the Manager in exchange for cash
proceeds from our initial public offering and common stock. In
response to dislocations in the overall credit market, and in
particular the securitized financing markets, in late 2007, we
redirected our focus to place greater emphasis on high quality
healthcare-related real estate equity investments.
Our Manager is a healthcare finance company that offers a
full-spectrum of financing solutions and related strategic
advisory services to companies across the healthcare industry
throughout the United States. Our Manager was formed in 2004 and
is a wholly-owned subsidiary of CIT Group Inc.
(“CIT”), a leading middle market global commercial
finance company that provides financial and advisory services.
As of December 31, 2009, we maintained a diversified
investment portfolio consisting of $56.1 million in
unconsolidated joint ventures that own real estate,
$101.5 million invested in wholly owned real estate and
$25.3 million in 3 investments in mortgage loans that are
held at lower of cost or market. Our current investments in
healthcare real estate include medical office buildings and
assisted and independent living facilities and Alzheimer
facilities. Our mortgage loan portfolio is primarily composed of
first mortgages on skilled nursing facilities and mixed-use
facilities. In 2010, one borrower repaid one of the
Company’s mortgage loans and we sold one mortgage loan to a
third party.
46
As a REIT, we generally will not be subject to federal taxes on
our REIT taxable income to the extent that we distribute our
taxable income to stockholders and maintain our qualification as
a REIT.
We have used short-term financing, in the form of a warehouse
facility, to partially finance our investments. The Company
executed a warehouse facility with Column Financial Inc, an
affiliate of Credit Suisse Securities, LLC on October 1,
2007. On March 9, 2009, we repaid these borrowings in full
and terminated the warehouse line. (See Note 9).
Critical
Accounting Policies
Our financial statements are prepared in conformity with
accounting principles generally accepted in the United States of
America, which requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could
differ from those estimates. Set forth below is a summary of our
accounting policies that we believe are critical to the
preparation of our consolidated financial statements. This
summary should be read in conjunction with a more complete
discussion of our accounting policies included in Note 2 to
the consolidated financial statements in this Annual Report on
Form 10-K.
Consolidation
The consolidated financial statements include the Company’s
accounts and those of our subsidiaries, which are wholly-owned
or controlled by us. All significant intercompany balances and
transactions have been eliminated.
Investments in partially-owned entities where the Company
exercises significant influence over operating and financial
policies of the subsidiary, but does not control the subsidiary,
are reported under the equity method of accounting. Generally
under the equity method of accounting, the Company’s share
of the investee’s earnings or loss is included in the
Company’s operating results.
Accounting Standards Codification 810
Consolidation
(“
ASC 810
”), requires a company to identify
investments in other entities for which control is achieved
through means other than voting rights (“variable interest
entities” or “VIEs”) and to determine which
business enterprise is the primary beneficiary of the VIE. A
variable interest entity is broadly defined as an entity where
either the equity investors as a group, if any, do not have a
controlling financial interest or the equity investment at risk
is insufficient to finance that entity’s activities without
additional subordinated financial support. The Company
consolidates investments in VIEs when it is determined that the
Company is the primary beneficiary of the VIE at either the
creation or the variable interest entity or upon the occurrence
of a reconsideration event. The Company has concluded that
neither of its partially-owned entities are VIEs.
Investments in Loans Held at LOCOM
Investments in loans amounted to $25.3 million at
December 31, 2009. We account for our investment in loans
in accordance with Accounting Standards Codification 948
Financial Services — Mortgage Banking (“ASC
948”), which codified the FASB’s
Accounting for
Certain Mortgage Banking
. Under ASC 948, loans expected to
be held for the foreseeable future or to maturity should be held
at amortized cost, and all other loans should be held at the
lower of cost or market (LOCOM), measured on an individual
basis. In accordance with ASC 820
Fair Value Measurements and
Disclosures
(“ASC 820”), the Company includes
nonperformance risk in calculating fair value adjustments. As
specified in ASC 820, the framework for measuring fair value is
based on independent observable inputs of market data and
follows the following hierarchy:
Level 1 — Quoted prices in active markets for
identical assets and liabilities.
Level 2 — Significant observable inputs based on
quoted prices for similar instruments in active markets, quoted
prices for identical or similar instruments in markets that are
not active and model-based valuations for which all significant
assumptions are observable.
47
Level 3 — Significant unobservable inputs that
are supported by little or no market activity that are
significant to the fair value of the assets or liabilities.
At December 31, 2008, in connection with our decision to
reposition ourselves from a mortgage REIT to a traditional
direct property ownership REIT (referred to as an equity REIT,
see Notes 2, 4, and 5 to the consolidated financial
statements) and as a result of existing market conditions, we
transferred our portfolio of mortgage loans to LOCOM because we
are no longer certain that we will hold the portfolio of loans
either until maturity or for the foreseeable future. Until
December 31, 2008, we held our loans until maturity, and
therefore the loans had been carried at amortized cost, net of
unamortized loan fees, acquisition and origination costs, unless
the loans were impaired. In connection with the transfer, we
recorded an initial valuation allowance of approximately
$29.3 million representing the difference between our
carrying amount of the loans and their estimated fair value at
December 31, 2008. At December 31, 2009, the valuation
allowance was reduced to $8.4 million representing the
difference between the carrying amounts and estimated fair value
of the Company’s three remaining loans.
Coupon interest on the loans is recognized as revenue when
earned. Receivables are evaluated for collectability if a loan
becomes more than 90 days past due. If fair value is lower
than amortized cost, changes in fair value (gains and losses)
are reported through our consolidated statement of operations
through a valuation allowance on loans held at LOCOM. Loans
previously written down may be written up based upon subsequent
recoveries in value, but not above their cost basis.
Expense for credit losses in connection with loan investments is
a charge to earnings to increase the allowance for credit losses
to the level that management estimates to be adequate to cover
probable losses considering delinquencies, loss experience and
collateral quality. Impairment losses are taken for impaired
loans based on the fair value of collateral on an individual
loan basis. The fair value of the collateral may be determined
by an evaluation of operating cash flow from the property during
the projected holding period,
and/or
estimated sales value computed by applying an expected
capitalization rate to the stabilized net operating income of
the specific property, less selling costs. Whichever method is
used, other factors considered relate to geographic trends and
project diversification, the size of the portfolio and current
economic conditions. Based upon these factors, we will establish
an allowance for credit losses when appropriate. When it is
probable that we will be unable to collect all amounts
contractually due, the loan is considered impaired.
Where impairment is indicated, an impairment charge is recorded
based upon the excess of the recorded investment amount over the
net fair value of the collateral. As of December 31, 2009,
we had no impaired loans and no allowance for credit losses.
We rely on significant subjective judgments and assumptions of
our Manager (i.e., discount rates, expected prepayments, market
comparables, etc.) regarding the above items. There may be a
material impact to these financial statements if our
Manager’s judgment or assumptions are subsequently
determined to be incorrect.
Real
Estate and Identified Intangible Assets
Real estate and identified intangible assets are carried at
cost, net of accumulated depreciation and amortization.
Betterments, major renewals and certain costs directly related
to the acquisition, improvement and leasing of real estate are
capitalized. Maintenance and repairs are charged to operations
as incurred. Depreciation is provided on a straight-line basis
over the assets’ estimated useful lives which range from 7
to 40 years.
Upon the acquisition of real estate, we assess the fair value of
acquired assets (including land, buildings and improvements, and
identified intangible assets such as above and below market
leases and acquired in-place leases and customer relationships)
and acquired liabilities in accordance Accounting Standards
Codification 805
Business Combinations
(“ASC
805”), and Accounting Standards Codification
350-30
Intangibles — Goodwill and other
(“ASC
350-30”),
and we allocate purchase price based on these assessments. We
assess fair value based on estimated cash flow projections that
utilize appropriate discount and capitalization rates and
available market information. Estimates of future cash flows are
based on a number of factors including the historical operating
results, known trends, and market/economic conditions that may
affect the property.
48
Our properties, including any related intangible assets, are
reviewed for impairment under ACS
360-10-35-15,
Impairment or Disposal of Long-Lived Assets
, (“ASC
360-10-35-15)
if events or circumstances change indicating that the carrying
amount of the assets may not be recoverable. Impairment exists
when the carrying amount of an asset exceeds its fair value. An
impairment loss is measured based on the excess of the carrying
amount over the fair value. We have determined fair value by
using a discounted cash flow model and an appropriate discount
rate. The evaluation of anticipated cash flows is subjective and
is based, in part, on assumptions regarding future occupancy,
rental rates and capital requirements that could differ
materially from actual results. If our anticipated holding
periods change or estimated cash flows decline based on market
conditions or otherwise, an impairment loss may be recognized.
As of December 31, 2009, we have not recognized an
impairment loss.
Revenue Recognition
Interest income on investments in loans is recognized over the
life of the investment on the accrual basis. Fees received in
connection with loans are recognized over the term of the loan
as an adjustment to yield. Anticipated exit fees whose
collection is expected will also be recognized over the term of
the loan as an adjustment to yield. Unamortized fees are
recognized when the associated loan investment is repaid before
maturity on the date of such repayment. Premium and discount on
purchased loans are amortized or accreted on the effective yield
method over the remaining terms of the loans.
Income recognition will generally be suspended for loan
investments at the earlier of the date at which payments become
90 days past due or when, in our opinion, a full recovery
of income and principal becomes doubtful. Income recognition is
resumed when the loan becomes contractually current and
performance is demonstrated to be resumed. For the years ended
December 31, 2009 and 2008, we have no loans for which
income recognition has been suspended.
The Company recognizes rental revenue in accordance with
Accounting Standards Codification 840
Leases
(“ASC
840”). ASC 840 requires that revenue be recognized on a
straight-line basis over the non-cancelable term of the lease
unless another systematic and rational basis is more
representative of the time pattern in which the use benefit is
derived from the leased property. Renewal options in leases with
rental terms that are lower than those in the primary term are
excluded from the calculation of straight line rent if the
renewals are not reasonably assured. We commence rental revenue
recognition when the tenant takes control of the leased space.
The Company recognizes lease termination payments as a component
of rental revenue in the period received, provided that there
are no further obligations under the lease.
Stock-based Compensation Plans
We have two stock-based compensation plans, described more fully
in Note 14. We account for the plans using the fair value
recognition provisions of ASC
505-50
Equity-Based Payments to Non-Employees
(“ASC
505-50”)
and ASC 718 —
Compensation — Stock
Compensation
(“ASC 718”). ASC
505-50
and
ASC 718 require that compensation cost for stock-based
compensation be recognized ratably over the service period of
the award for non employees and board members, respectively.
Because all of our stock-based compensation is issued to
non-employees, the amount of compensation is adjusted in each
subsequent reporting period based on the fair value of the award
at the end of the reporting period until such time as the award
has vested or the service being provided is substantially
completed or, under certain circumstances, likely to be
completed, whichever occurs first.
Derivative Instruments
We account for derivative instruments in accordance with
Accounting Standards Codification 815
Derivatives and Hedging
(“ASC 815”). In the normal course of business, we
may use a variety of derivative instruments to manage, or hedge,
interest rate risk. We will require that hedging derivative
instruments be effective in reducing the interest rate risk
exposure they are designated to hedge. This effectiveness is
essential for qualifying for hedge accounting. Some derivative
instruments may be associated with an anticipated transaction.
In those cases, hedge effectiveness criteria also require that
it be probable that the underlying transaction will occur.
Instruments that meet these hedging criteria will be formally
designated as hedges at the inception of the derivative contract.
49
To determine the fair value of derivative instruments, we may
use a variety of methods and assumptions that are based on
market conditions and risks existing at each balance sheet date.
For the majority of financial instruments including most
derivatives, long-term investments and long-term debt, standard
market conventions and techniques such as discounted cash flow
analysis, option-pricing models, replacement cost, and
termination cost are likely to be used to determine fair value.
All methods of assessing fair value result in a general
approximation of fair value, and such value may never actually
be realized.
We may use a variety of commonly used derivative products that
are considered “plain vanilla” derivatives. These
derivatives typically include interest rate swaps, caps, collars
and floors. We expressly prohibit the use of unconventional
derivative instruments and using derivative instruments for
trading or speculative purposes. Further, we have a policy of
only entering into contracts with major financial institutions
based upon their credit ratings and other factors, so we do not
anticipate nonperformance by any of our counterparties.
We may employ swaps, forwards or purchased options to hedge
qualifying forecasted transactions. Gains and losses related to
these transactions are deferred and recognized in net income as
interest expense in the same period or periods that the
underlying transaction occurs, expires or is otherwise
terminated.
Hedges that are reported at fair value and presented on the
balance sheet could be characterized as either cash flow hedges
or fair value hedges. For derivative instruments not designated
as hedging instruments, the gain or loss resulting from the
change in the estimated fair value of the derivative instruments
will be recognized in current earnings during the period of
change.
Income
Taxes
We have elected to be taxed as a REIT under Sections 856
through 860 of the Code. To qualify as a REIT, we must meet
certain organizational and operational requirements, including a
requirement to distribute at least 90% of our REIT taxable
income to our stockholders. As a REIT, we generally will not be
subject to federal income tax on taxable income that we
distribute to our stockholders. If we fail to qualify as a REIT
in any taxable year, we will then be subject to federal income
tax on our taxable income at regular corporate rates and we will
not be permitted to qualify for treatment as a REIT for federal
income tax purposes for four years following the year during
which qualification is lost unless the Internal Revenue Service
grants us relief under certain statutory provisions. Such an
event could materially adversely affect our net income and net
cash available for distributions to stockholders. However, we
believe that we will operate in such a manner as to qualify for
treatment as a REIT and we intend to operate in the foreseeable
future in such a manner so that we will qualify as a REIT for
federal income tax purposes. We may, however, be subject to
certain state and local taxes.
In July 2006, the FASB issued Interpretation No. 48
“Accounting for Uncertainty in Income Taxes — An
Interpretation of FASB Statement No. 109”
(“FIN 48”). ASC 740 prescribes a recognition
threshold and measurement attribute for how a company should
recognize, measure, present, and disclose in its financial
statements uncertain tax positions that the company has taken or
expects to take on a tax return. ASC 740 requires that the
financial statements reflect expected future tax consequences of
such positions presuming the taxing authorities’ full
knowledge of the position and all relevant facts, but without
considering time values. ASC 740 was adopted by the Company and
became effective beginning January 1, 2007. The
implementation of ASC740 has not had a material impact on the
Company’s consolidated financial statements.
Earnings per Share
We present basic earnings per share or EPS in accordance with
ASC 260,
Earnings per Share
. We also present diluted EPS,
when diluted EPS is lower than basic EPS. Basic EPS excludes
dilution and is computed by dividing net income by the weighted
average number of common shares outstanding during the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were
exercised or converted into common stock, where such exercise or
conversion would result in a lower EPS amount. At
December 31, 2009, diluted EPS was the same as basic EPS
because all outstanding restricted stock awards were
anti-dilutive. The operating partnership units issued in
connection with an investment (See Note 6) are in
escrow and do not impact EPS.
50
Use
of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those
estimates.
Concentrations of Credit Risk
Financial instruments that potentially subject us to
concentrations of credit risk consist primarily of cash
investments, real estate, loan investments and interest
receivable. We may place our cash investments in excess of
insured amounts with high quality financial institutions. We
perform ongoing analysis of credit risk concentrations in our
real estate and loan investment portfolio by evaluating exposure
to various markets, underlying property types, investment
structure, term, sponsors, tenant mix and other credit metrics.
The collateral securing our loan investments are real estate
properties located in the United States.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160
Noncontrolling Interests in Consolidated Financial
Statements,
which was codified in FASB ASC 810
Consolidation
(“ASC 810”). ASC 810 requires
that a noncontrolling interest in a subsidiary be reported as
equity and the amount of consolidated net income specifically
attributable to the noncontrolling interest be identified in the
consolidated financial statements. It also calls for consistency
in the manner of reporting changes in the parent’s
ownership interest and requires fair value measurement of any
noncontrolling equity investment retained in a deconsolidation.
ASC 810 is effective for the Company on January 1, 2009.
The Company records its investments using the equity method and
does not consolidate these joint ventures. As such, there is no
impact upon adoption of ASC 810 on its consolidated financial
statements.
On March 20, 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities,
which is codified in FASB ASC 815
Derivatives
and Hedging Summary
(“ASC 815”). The derivatives
disclosure pronouncement provides for enhanced disclosures about
how and why an entity uses derivatives and how and where those
derivatives and related hedged items are reported in the
entity’s financial statements. ASC 815 also requires
certain tabular formats for disclosing such information. ASC 815
applies to all entities and all derivative instruments and
related hedged items accounted for under this new pronouncement.
Among other things, ASC 815 requires disclosures of an
entity’s objectives and strategies for using derivatives by
primary underlying risk and certain disclosures about the
potential future collateral or cash requirements (that is, the
effect on the entity’s liquidity) as a result of contingent
credit-related features. ASC 815 is effective for the Company on
January 1, 2009. The Company adopted ASC 815 in the first
quarter of 2009 and included disclosures in its consolidated
financial statements addressing how and why the Company uses
derivative instruments, how derivative instruments are accounted
for and how derivative instruments affect the Company’s
financial position, financial performance, and cash flows. (See
Note 9)
On January 21, 2010, the FASB issued ASU
2010-06,
which amends ASC 820 to add new requirements for disclosures
about transfers into and out of Levels 1 and 2 and separate
disclosures about purchases, sales, issuances, and settlements
relating to Level 3 measurements. The ASU also clarifies
existing fair value disclosures about the level of
disaggregation and about inputs and valuation techniques used to
measure fair value. The ASU is effective for the first reporting
period (including interim periods) beginning after
December 15, 2009, except for the requirement to provide
the Level 3 activity of purchases, sales, issuances, and
settlements on a gross basis, which will be effective for fiscal
years beginning after December 15, 2010, and for interim
periods within those fiscal years, with early adoption permitted.
Results
of Operations
The following compares our results of operations for the year
ended December 31, 2009, against our results of operations
for the year ended December 31, 2008.
51
Revenue
Rental
Revenues
During the year ended December 31, 2009, we recognized
$12.7 million of rental revenue on the twelve properties
acquired in the Bickford transaction in June 2008 and the
acquisition of two additional properties from Bickford in
September 2008, as compared with $6.2 million during the
year ended December 31, 2008, an increase of approximately
$6.5 million. The increase in revenue was the result of
recognizing a full period of rental income during the year ended
December 31, 2009 from the twelve properties acquired in
June 2008 and the two properties acquired in September 2008 as
compared with recognition of revenue for the respective portion
of the full year period for these properties during the year
ended December 31, 2008.
Income
from Investments in Loans
We earned income on our portfolio of mortgage loan investments
of approximately $7.1 million in the year ended
December 31, 2009 as compared with approximately
$15.8 million in 2008, a decrease of approximately
$8.7 million. Our portfolio of mortgage investments are
floating rate based upon LIBOR. The decrease in income related
to this portfolio is primarily attributable to (i) a lower
average outstanding principal from mortgage loans during the
year ended December 31, 2009 as compared with the
comparable period 2008 period and (ii) the decrease in
average LIBOR during the year ended December 31, 2009 as
compared with the year ended December 31, 2008. The lower
average outstanding principal from mortgage loans was the result
of loan prepayments and loan sales that occurred throughout 2009
(See Note 5 to the consolidated financial statements). The
average one month LIBOR during the year ended December 31,
2009 was 0.34% as compared with 2.68% for the year ended
December 31, 2008. Mitigating some of the decrease in LIBOR
were interest rate floors which placed limits on how low the
respective loans could reset. Our portfolio of mortgage
investments are all variable rate instruments, and at
December 31, 2009, had a weighted average spread of 6.76%
over one month LIBOR, with an effective yield of 6.99% and an
average maturity of 1.0 year at December 31, 2009.
Other
Income
Other income in 2009 amounted to $0.2 million and consisted
of ancillary fees which approximated the fees earned in 2008.
Expenses
Expenses for the year ended December 31, 2009 amounted to
approximately $14.2 million, as compared to approximately
$44.3 million for 2008, for a decrease of
$31.1 million. This decrease primarily relates to a year
over year change of $33.2 million from a $4.0 million
2009 benefit from valuation adjustments as compared with a
$29.3 million 2008 charge for a valuation allowance on our
loans held at LOCOM. The year over year decrease in expenses
related to this adjustment is $33.3 million and is
discussed below. The net increase in expenses, excluding the
change in the valuation allowance for investments held at LOCOM,
is $2.2 million. This increase consists of an increase in
marketing, general and administrative expenses largely related
to costs associated with pursuing strategic alternatives of
$3.9 million (before considering stock-based compensation
expense), an increase in depreciation and amortization related
to the acquisition of the Bickford properties
(Note 3) of $1.8 million, offset by a decrease in
management fees of $1.9 million discussed below, and
recognizing a $2.7 million loss on the sale of a mortgage
loan to our Manager in 2008.
Management
Fees
For the year ended December 31, 2009 we recorded management
fee expense payable to our Manager under our management
agreement of $2.2 million as compared with
$4.1 million during the 2008 year, a decrease of
$1.9 million. The decrease in management fee expense is
primarily attributable to the reduction in the base management
fee in accordance with the first amendment to the Company’s
management agreement, which was in effect for the entire fiscal
year ended December 31, 2009 as compared with five months
of impact during the year ended December 31, 2008.
52
Marketing,
General and Administrative
Marketing, general and administrative expenses amounted to
$11.6 million for the year ended December 31, 2009 and
consist of fees for professional services, insurance, general
overhead costs for the Company and real estate taxes on our
facilities, as compared with $6.6 million for the year
ended December 31, 2008, an increase of approximately
$5.0 million. The increase is primarily attributable to
legal and advisory fees incurred during 2009 in connection with
the ongoing review of the Company’s strategic direction.
Pursuant to ASC
505-50,
we
recognized an expense of $2.3 million for the year ended
December 31, 2009 related to remeasurement of stock grants
as compared with an expense of $1.2 million for the year
ended December 31, 2008, an increase of approximately
$1.1 million. The increase was principally the result of
the impact of additional share issuances and accelerated vesting
of stock-based compensation resulting from the January 28,
2010 shareholder vote approving the plan of liquidation
(see Notes 14 and 19 to the consolidated financial
statements). Upon approval of the plan of liquidation, most of
the Company’s remaining stock grants vested immediately. In
addition, for each of the years ended December 31, 2009 and
December 31, 2008, we paid $0.3 million in stock-based
compensation related to shares of our common stock earned by our
independent directors as part of their compensation. Each
independent director is paid a base retainer of $100,000
annually, which is payable 50% in cash and 50% in stock.
Payments are made quarterly in arrears. Shares of our common
stock issued to our independent directors as part of their
annual compensation vest immediately and are expensed by us
accordingly.
Valuation
Allowance on Loans Held at LOCOM and Realized (Gain)/ Loss on
Loans Sold
The year over year valuation allowance changed favorable by
$33.3 million. At December 31, 2008, reflecting a
change in Care’s strategies in connection with our decision
to reposition ourselves from a mortgage REIT to a traditional
direct property ownership REIT (referred to as an equity REIT,
see Notes 2 and 4 to the financial statements) and as a
result of existing market conditions, we reclassified our
portfolio of mortgage loans to LOCOM and recorded a charge of
$29.3 million. During the year ended December 31, 2009
the Company recognized a favorable adjustment of
$4.0 million on its loans carried at the lower of cost or
market, which gives rise to the $33.3 million improvement
as compared with the 2008 charge to earnings of
$29.3 million. Interim assessments were made of carrying
values of the loan based on available data, including sale and
repayments on a quarterly basis during 2009. Gains or losses on
sales are determined by comparing proceeds to carrying values
based on interim assessments resulting in a gain of
$1.1 million for the year ended December 31, 2009 as
compared with a loss of $2.7 million for the year ended
December 31, 2008. Available data included appraisals,
repayments and mortgage loan sales to our manager and to third
parties (see Note 5 to the financial statements).
Depreciation
and Amortization
Depreciation and amortization expenses increased to
$3.4 million in the fiscal year ended 2009 from
$1.6 million for the comparable period in 2008, primarily
as a result of recognizing a full annual period of depreciation
and amortization during the year ended December 31, 2009
from the twelve Bickford properties acquired in June 2008 and
the two Bickford properties acquired in September 2008 as
compared with recognition of depreciation and amortization for
the respective portion of the full year period for these
properties during the year ended December 31, 2008.
Interest
Expense
We incurred interest expense of $6.5 million for the year
ended December 31, 2009, as compared with interest expense
of $4.5 million for the year ended December 31, 2008,
an increase of $2.0 million. The increase in interest
expense is primarily attributable to the 2009 recognition of a
full period of interest expense on the debt incurred to finance
the acquisition of the twelve properties acquired in the
Bickford transaction in June 2008 and the acquisition of the two
properties in the Bickford transaction in September 2008 as
compared with the recognition in 2008 of interest expense for
the portion of the full year period after the respective dates
of acquisition. This was partially offset by the incurrence of a
full period of interest expense under our warehouse line of
credit during the fiscal ended December 31, 2008 as
compared with a partial quarter of interest expense under our
warehouse line of credit during the year ended December 31,
2009.
Loss on
Partially Owned Entities
For the year ended December 31, 2009, net loss from
partially-owned entities amounted to $4.4 million as
compared with a net loss of $4.4 million for the year ended
December 31, 2008. Our equity in the non-cash operating
loss of the Cambridge properties for the year ended 2009 was
$5.6 million, which included $9.6 million
53
attributable to our share of the depreciation and amortization
expenses associated with the Cambridge properties, which was
partially offset by our share of equity income in the SMC
properties of $1.2 million.
Unrealized
Gain on Derivative Instruments
We recognized an unrealized gain on derivative investments of
approximately $0.1 million in 2009, primarily representing
a decrease in the liability associated with the obligation to
issue operating partnership units in connection with the
Cambridge transaction.
Cash
Flows
Cash and cash equivalents were $122.5 million at
December 31, 2009 as compared with $31.8 million at
December 31, 2008, an increase of approximately
$90.7 million. Cash during the year ended 2009 was
generated from $136.0 million in proceeds from our
investing activities and $6.7 million from operations,
offset by $51.9 million used for financing activities
during the period.
Net cash provided by operating activities for the fiscal year
ended December 31, 2009 amounted to $6.7 million as
compared with $13.0 million for the comparable period in
2008, a decrease of approximately $6.3 million. Net loss
before adjustments was $2.8 million. Equity in the
operating results of, and distributions from, investments in
partially-owned entities added $11.3 million. Non-cash
charges for straight-line effects of lease revenue, gains on
sales of loans, adjustment to our valuation allowance on loans
at LOCOM, amortization of loan premium, amortization and
write-off of deferred financing costs, amortization of deferred
loan fees, stock based compensation, net unrealized gain on
derivatives, and depreciation and amortization used less than
$0.1 million. The net change in operating assets and
liabilities used $1.8 million and consisted of an increase
in accrued interest receivable and other assets of
$1.1 million and an increase in accounts payable and
accrued expenses of $0.6 million, offset by a
$3.5 million decrease in other liabilities including
amounts payable to a related party.
Net cash provided by investing activities for the twelve months
ended December 31, 2009 was $136.0 million as compared
with a use of $67.9 million for the year ended
December 31, 2008, an increase of approximately
$203.9 million. The increase is primarily attributable to
the cash generated from the divestiture and repayment of the
Company’s mortgage loans during 2009, consisting of sales
of loans to our Manager of $42.2 million, sales of loans to
third parties of $55.8 million and loan repayments received
of $40.4 million, offset by new investments of
$2.5 million during the year ended 2009, as compared with
loan repayments received of $54.2 million and new
investments of $122.2 million during the year ended
December 31, 2008. New investments in 2008 consisted of
investments in real estate of $111.0 million, investments
in partially-owned entities of $0.3 million and loan
investments of $10.9 million.
Net cash used in financing activities for the year ended
December 31, 2009 was $51.9 million as compared with
net cash provided by financing activities of $71.4 million
for the year ended December 31, 2008, a decrease of
$123.3 million. The decrease is primarily attributable to
the repayment of $37.8 million and subsequent termination
of our warehouse line of credit, dividend treasury stock
purchases of $8.3 million and $1.0 million related to
payment of financing costs associated with borrowings for the
Bickford transaction. There were no material new borrowings
during 2009 as compared with borrowings under the warehouse line
of credit of $13.6 million during 2008 and borrowings of
$82.2 million to finance the acquisition of 14 properties
in the Bickford transaction.
Liquidity
and Capital Resources
Liquidity is a measurement of our ability to meet potential cash
requirements, including ongoing commitments to repay borrowings,
fund and maintain loans and other investments, pay dividends and
other general business needs. Our primary sources of liquidity
are rental income from our real estate properties, distributions
from our joint ventures, net interest income earned on our
portfolio of mortgage loans and interest income earned from our
available cash balances. We also obtain liquidity from
repayments of principal by our borrowers in connection with our
loans.
54
As of December 31, 2009, the Company had
$122.5 million in cash and cash equivalents. Due to the
repayment of a mortgage loan in February which generated net
proceeds of $9.7 million and a sale of a mortgage loan in
March which generated net proceeds of $5.9 million, we had
$136.3 million in cash and cash equivalents as of
March 11, 2010.
Historically, we relied on borrowings under a warehouse line of
credit along with a Mortgage Purchase Agreement
(“MPA”) with our Manager to fund our investments. In
October 2007, we obtained a warehouse line of credit from Column
Financial, an affiliate of Credit Suisse, under which we
borrowed funds collateralized by the mortgage loans in our
portfolio. In March 2009, we repaid these borrowings in full
with cash on hand. In September 2008, we entered into a Mortgage
Purchase Agreement (“MPA”) with our Manager in order
to secure a potential additional source of liquidity. Pursuant
to the MPA, we had the right, subject to the conditions of the
MPA, to cause the Manager to purchase our mortgage loans at
their then-current fair market value, as determined by a third
party appraiser. On January 28, 2010, upon the effective
date of the second amendment to the Management Agreement with
our Manager, the MPA was terminated and all outstanding notices
of our intent to sell additional loans to our Manager were
rescinded.
To maintain our status as a REIT under the Code, we must
distribute annually at least 90% of our REIT taxable income.
These distribution requirements limit our ability to retain
earnings and thereby replenish or increase capital for
operations.
Sale of
Control of the Company
On March 16, 2010, we executed a definitive agreement with
Tiptree Financial Partners, L.P. (“Tiptree” of the
“Buyer”) for the sale of control of the Company in a
series of contemplated transactions. Under the agreement, the
parties have agreed to a sale of a quantity of shares to the
Buyer to occur immediately following the completion of a cash
tender offer by us for Care’s outstanding common shares.
The quantity of shares to be sold to the Buyer will be that
quantity which would represent at least 53.4% of the shares of
the Company’s common stock on a fully diluted basis after
completion of the Company’s cash tender offer. The
agreement is subject to customary closing conditions and our
ability to proceed with the cash tender offer.
In connection with the sale transaction contemplated by the
agreement, we intend to make a cash tender offer for up to 100%
of the outstanding common shares of Care stock at an offer price
of $9.00 per share, subject to a minimum subscription of
10,300,000 shares of Care stock. Also, in connection with the
transaction, the Company intends to terminate its existing
management agreement with our Manager and it is anticipated that
the resulting company will be advised by an affiliate of Tiptree.
We intend to seek shareholder approval to abandon the plan of
liquidation and pursue the contemplated transactions described
above. If the contemplated transactions are not completed, we
may pursue the plan of liquidation as approved by the
stockholders on January 28 or we may consider other strategic
alternatives to liquidation. In the event that a liquidation of
the Company is pursued, material adjustments to these going
concern financial statements may need to be recorded to present
liquidation basis financial statements. Material adjustments
which may be required for liquidation basis accounting primarily
relate to reflecting assets and liabilities at their net
realizable value and costs to be incurred to carry out the plan
of liquidation. After such adjustments, the likely range of
equity value which would be presented in liquidation basis
financial statement would be between $8.05 and 8.90 per share.
Contractual
Obligations
The table below summarizes our contractual obligations as of
December 31, 2009.
|
Amounts in millions
|
2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | ||||||||||||||||||
|
Commitment to fund tenant improvements
|
$ | 1.9 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
Commitment to fund earn out
|
7.2 | — | — | — | — | — | ||||||||||||||||||
|
Mortgage notes payable
|
6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 80.4 | ||||||||||||||||||
|
Management fee
|
1.5 | 1.5 | — | — | — | — | ||||||||||||||||||
|
Buyout fee to Manager
|
5.0 | 2.5 | — | — | — | — | ||||||||||||||||||
55
We have commitments at December 31, 2009 to finance tenant
improvements of $1.9 million and earn out of
$7.2 million. The commitment amount for the earn out is
contingent upon meeting certain conditions. If those conditions
are not met, our obligation to fund those commitments would be
zero. $1.7 million of tenant improvement represents hold
back from the initial purchase of Cambridge. No provision for
the earn out contingency has been accrued at December 31,
2009. The estimated amounts and timing of the commitments to
fund tenant improvements are based on projections by the
managers who are affiliates of Cambridge and Bickford.
At December 31, 2009, we were obligated to pay our Manager
a base management fee on a monthly basis along with a buyout fee
of $7.5 million. See “Related Party Transactions and
Agreements — Management Agreement” below.
Pursuant to the terms of the second amendment to the Management
Agreement, the Manager is also eligible for an incentive fee of
$1.5 million if the cash ultimately distributed to our
stockholder. Pursuant to the plan of liquidation or otherwise
equals or exceeds $9.25 per share.
On June 26, 2008 with the acquisition of the twelve
properties from Bickford Senior Living Group LLC, the Company
entered into a mortgage loan with Red Mortgage Capital, Inc. for
$74.6 million. The terms of the mortgage require
interest-only payments at a fixed interest rate of 6.845% for
the first twelve months. Commencing on the first anniversary and
every month thereafter, the mortgage loan requires a fixed
monthly payment of $0.5 million for both principal and
interest until the maturity in July 2015 when the then
outstanding balance of $69.6 million is due and payable.
Care paid approximately $0.3 million in principal
amortization during the year ended December 31, 2009. The
mortgage loan is collateralized by the properties.
On September 30, 2008 with the acquisition of the two
additional properties from Bickford, the Company entered into an
additional mortgage loan with Red Mortgage Capital, Inc. for
$7.6 million. The terms of the mortgage require interest
and principal payments of approximately $52,000 based on a fixed
interest rate of 7.17% until the maturity in July 2015 when the
then outstanding balance of $7.1 million is due and
payable. Care paid approximately $0.1 in principal amortization
during the year ended December 31, 2009. The mortgage loan
is collateralized by the properties.
Off-Balance
Sheet Arrangements
As discussed above in “Business — Unconsolidated
Joint Ventures,” we own interests in certain unconsolidated
joint ventures. Our risk of loss associated with these
investments is limited to our investment in the joint venture.
However, under the terms of our investment in the joint venture
with Cambridge, Cambridge has the contractual right to put its
15% interest in the properties to us in the event we enter into
a change in control transaction. Pursuant to the terms of our
joint venture with Cambridge, we provided notice to Cambridge on
May 7, 2009 that we had entered into a term sheet with a
third party for a transaction that would result in a change in
control of Care which notice triggered Cambridge’s
contractual right to “put” its interests in the joint
venture to us at a price equal to the then fair market value of
such interests, as mutually agreed by the parties, or, lacking
such mutual agreement, at a price determined through qualified
third party appraisals. Cambridge did not exercise its right to
put its 15% joint venture interest to us in connection with our
entry into the term sheet with the third party. As a result, we
believe that Cambridge’s contractual put right expired.
Dividends
To maintain our qualification as a REIT, we must pay annual
dividends to our stockholders of at least 90% of our REIT
taxable income, determined before taking into consideration the
dividends paid deduction and net capital gains. Before we pay
any dividend, whether for federal income tax purposes or
otherwise, we must first meet both our operating requirements
and any scheduled debt service on our outstanding borrowings.
Related
Party Transactions and Agreements
Management Agreement
In connection with our initial public offering, we entered into
a Management Agreement with our Manager, which describes the
services to be provided by our Manager and its compensation for
those services. Under the Management Agreement, our Manager,
subject to the oversight of our board of directors, is required
to conduct our
56
business affairs in conformity with the policies approved by our
board of directors. The Management Agreement had an initial term
scheduled to expire on June 30, 2010, which would
automatically be renewed for one-year terms thereafter unless
terminated by us or our Manager.
On September 30, 2008, we entered into an amendment (the
“Amendment”) to the Management Agreement between
ourselves and the Manager. Pursuant to the terms of the
Amendment, the Base Management Fee (as defined in the Management
Agreement) payable to the Manager under the Management Agreement
was reduced from a monthly amount equal to
1
/
12
of 1.75% of the Company’s equity (as defined in the
Management Agreement) to a monthly amount equal to
1
/
12
of 0.875% of the Company’s equity. In addition, pursuant to
the terms of the Amendment, the Incentive Fee (as defined in the
Management Agreement) payable to the Manager pursuant to the
Management Agreement was eliminated and the Termination Fee (as
defined in the Management Agreement) payable to the Manager upon
the termination or non-renewal of the Management Agreement was
amended to equal the average annual Base Management Fee as
earned by the Manager during the two years immediately preceding
the most recently completed fiscal quarter prior to the date of
termination times three, but in no event be less than
$15.4 million. No termination fee would be payable if we
terminate the Management Agreement for cause.
In consideration of the Amendment and for the Manager’s
continued and future services to the Company, the Company
granted the Manager warrants to purchase 435,000 shares of
the Company’s common stock at $17.00 per share (the
“Warrant”) under the Manager Equity Plan adopted by
the Company on June 21, 2007 (the “Manager Equity
Plan”). The Warrant, which is immediately exercisable,
expires on September 30, 2018.
On January 15, 2010, we entered into an Amended and
Restated Management Agreement with our Manager. Pursuant to the
terms of the Amended and Restated Management Agreement, which
became effective upon approval of the Company’s plan of
liquidation by our stockholders on January 28, 2010, the
Base Management Fee was reduced to a monthly amount equal to
(i) $125,000 from February 1, 2010 until the earlier
of (x) June 30, 2010 and (y) the date on which
four of the Company’s six then-existing investments have
been sold; then from such date (ii) $100,000 until the
earlier of (x) December 31, 2010 and (y) the date
on which five of the Company’s six then-existing
investments have been sold; then from such date
(iii) $75,000 until the effective date of expiration or
earlier termination of the Agreement by either of the Company or
the Manager; provided, however, that notwithstanding the
foregoing, the base management fee shall remain at $125,000 per
month until the later of (a) ninety (90) days after
the filing by the Company of a Form 15 with the SEC; and
(b) the date that the Company is no longer subject to the
reporting requirements of the Exchange Act. In addition, the
termination fee payable to the Manager upon the termination or
non-renewal of the Management Agreement was replaced by a buyout
payment of $7.5 million, payable in installments of
(i) $2.5 million upon approval of the Company’s
plan of liquidation by our stockholders;
(ii) $2.5 million upon the earlier of
(a) April 1, 2010 and (b) the effective date of
the termination of the Amended and Restated Management Agreement
by either of the Company or the Manager; and
(iii) $2.5 million upon the earlier of
(a) June 30, 2011 and (b) the effective date of
the termination of the Amended and Restated Management Agreement
by either the Company or the Manager. The Amended and Restated
Management Agreement also provided the Manager with an incentive
fee of $1.5 million if (i) at any time prior to
December 31, 2011, the aggregate cash dividends paid to the
Company’s stockholders since the effective date of the
Amended and Restated Management Agreement equal or exceed $9.25
per share or (ii) as of December 31, 2011, the sum of
(x) the aggregate cash dividends paid to the Company’s
stockholders since the effective date of the Amended and
Restated Management Agreement and (y) the aggregate
distributable cash equals or exceeds $9.25 per share. In the
event that the aggregate distributable cash equals or exceed
$9.25 per share but for the impact of payment of a
$1.5 million incentive fee, the Company shall pay the
Manager an incentive fee in an amount that allows the aggregate
distributable cash to equal $9.25 per share. Under the Amended
and Restated Management Agreement, the Mortgage Purchase
Agreement by and between us and our Manager was terminated and
all outstanding notices of our intent to sell additional loans
to our Manager were rescinded. The Amended and Restated
Management Agreement shall continue in effect, unless earlier
terminated in accordance with the terms thereof, until
December 31, 2011.
For the periods ended December 31, 2009 and
December 31, 2008, we recognized $2.2 million and
$4.1 million in management fee expense related to the base
management fee, respectively. Since our initial
57
public offering, transactions with our Manager relating to our
initial public offering and the Management Agreement included:
| • | The acquisition of our initial assets from our Manager upon the completion of our initial public offering. The fair value of the acquisitions was approximately $283.1 million inclusive of approximately $4.6 million in premium. In exchange for these assets, we issued 5,256,250 restricted shares of common stock to our Manager at a fair value of approximately $78.8 million and paid approximately $204.3 million in cash from the proceeds of our initial public offering. | |
| • | Our issuance of 607,690 shares of common stock issued to our Manager concurrently with our initial public offering at a fair value of $9.1 million at date of grant. These shares vested immediately and therefore their fair value was expensed at issuance; | |
| • | Our issuance of 133,333 restricted shares of common stock to our Manager’s employees, some of who are also our officers or directors, and 15,000 shares to our independent directors, with a total fair value of approximately $2.2 million at the date of grant. The shares granted to our Manager’s employees and the shares granted to our independent directors vested immediately upon approval of the Company’s plan of liquidation by its shareholders. Pursuant to SFAS 123R, we recognized approximately $0.3 million in expense for the period from June 22, 2007 (commencement of operations) to December 31, 2007, related to these grants. | |
| • | Our $0.5 million liability to our Manager as of December 31, 2009 consisting primarily of accrued base management fees and $3.8 million liability to our Manager as of December 31, 2008 for professional fees paid and other third party costs incurred by our Manager on behalf of Care related to the initial public offering of our common stock ($1.5 million) and business operations $2.3 million; and | |
| • | Expenses of $2.2 million for the base management fee as required pursuant to our agreement with our Manager for the year ended December 31, 2009 and expenses of $4.1 million for the base management fee for the comparable period in 2008. |
Mortgage
Purchase Agreement
On September 30, 2008, we entered into a Mortgage Purchase
Agreement (“MPA”) with our Manager in order to secure
a potential additional source of liquidity. Pursuant to the MPA,
the Company had the right, but not the obligation, to cause the
Manager to purchase its current senior mortgage assets (the
“Mortgage Assets”) at their then-current fair market
value, as determined by a third party appraiser. However, the
MPA provided that in no event shall the Manager be obligated to
purchase any Mortgage Asset if (a) the Manager had already
purchased Mortgage Assets with an aggregate sale price of
$125.0 million pursuant to the MPA or (b) the third
party appraiser determined that the fair market value of such
Mortgage Asset is greater than 105% of the then outstanding
principal balance of such Mortgage Asset. On January 28,
2010, upon the effective date of the Company’s Amended and
Restated Management Agreement with the Manager, the MPA was
terminated and all outstanding notices of our intent to sell
additional loans to our Manager were rescinded.
Pursuant to the MPA, we sold mortgage investments made to four
borrowers to our Manager for total proceeds of
$64.6 million. The sale of the first mortgage to our
Manager closed in November 2008 for proceeds of
$22.4 million and the sale of the second mortgage closed in
February 2009 for proceeds of $22.5 million. Additional
mortgages from two borrowers were sold to our Manager during
August and September 2009 and generated cash proceeds of
$2.3 million and $17.4 million, respectively.
Warrant
In consideration of the Amendment and for the Manager’s
continued and future services to the Company, the Company
granted the Manager warrants to purchase 435,000 shares of
the Company’s common stock at $17.00 per share (the
“Warrant”) under the Manager Equity Plan adopted by
the Company on June 21, 2007 (the “Manager Equity
Plan”). The Warrant, which is immediately exercisable,
expires on September 30, 2018.
58
Non-GAAP Financial
Measures
Funds
from Operations
Funds From Operations, or FFO, which is a non-GAAP financial
measure, is a widely recognized measure of REIT performance. We
compute FFO in accordance with standards established by the
National Association of Real Estate Investment Trusts, or
NAREIT, which may not be comparable to FFO reported by other
REITs that do not compute FFO in accordance with the NAREIT
definition, or that interpret the NAREIT definition differently
than we do.
The revised White Paper on FFO, approved by the Board of
Governors of NAREIT in April 2002 defines FFO as net income
(loss) (computed in accordance with GAAP), excluding gains (or
losses) from debt restructuring and sales of properties, plus
real estate related depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures.
Adjusted
Funds from Operations
Adjusted Funds From Operations, or AFFO, is a non-GAAP financial
measure. We calculate AFFO as net income (loss) (computed in
accordance with GAAP), excluding gains (losses) from debt
restructuring and gains (losses) from sales of property, plus
the expenses associated with depreciation and amortization on
real estate assets, non-cash equity compensation expenses, the
effects of straight lining lease revenue, excess cash
distributions from the Company’s equity method investments
and one-time events pursuant to changes in GAAP and other
non-cash charges. Proportionate adjustments for unconsolidated
partnerships and joint ventures will also be taken when
calculating the Company’s AFFO.
We believe that FFO and AFFO provide additional measures of our
core operating performance by eliminating the impact of certain
non-cash expenses and facilitating a comparison of our financial
results to those of other comparable REITs with fewer or no
non-cash charges and comparison of our own operating results
from period to period. The Company uses FFO and AFFO in this
way, and also uses AFFO as one performance metric in the
Company’s executive compensation program. The Company also
believes that its investors also use FFO and AFFO to evaluate
and compare the performance of the Company and its peers, and as
such, the Company believes that the disclosure of FFO and AFFO
is useful to (and expected of) its investors.
However, the Company cautions that neither FFO nor AFFO
represent cash generated from operating activities in accordance
with GAAP and they should not be considered as an alternative to
net income (determined in accordance with GAAP), or an
indication of our cash flow from operating activities
(determined in accordance with GAAP), a measure of our
liquidity, or an indication of funds available to fund our cash
needs, including our ability to make cash distributions. In
addition, our methodology for calculating FFO and / or
AFFO may differ from the methodologies employed by other REITs
to calculate the same or similar supplemental performance
measures, and accordingly, our reported FFO and / or
AFFO may not be comparable to the FFO and AFFO reported by other
REITs.
59
FFO and AFFO for the year ended December 31, 2009, were as
follows (dollars in thousands except per share data):
|
For the year ended
|
||||||||
| December 31, 2009 | ||||||||
| (In thousands, except share and per share data) | FFO | AFFO | ||||||
|
Net loss
|
$ | (2,826 | ) | $ | (2,826 | ) | ||
|
Depreciation and amortization from partially-owned entities
|
9,599 | 9,599 | ||||||
|
Depreciation and amortization on owned properties
|
3,415 | 3,415 | ||||||
|
Valuation allowance for loans carried at LOCOM
|
— | (4,046 | ) | |||||
|
Straight-line effects of lease revenue
|
— | (2,411 | ) | |||||
|
Excess cash distributions from the Company’s equity method
investments
|
— | 710 | ||||||
|
Write-off of deferred financing cost
|
— | 689 | ||||||
|
Gain on Loans Sold
|
— | (1,064 | ) | |||||
|
Obligation to issue OP Units
|
— | (153 | ) | |||||
|
Stock-based compensation
|
— | 2,270 | ||||||
|
Funds From Operations and Adjusted Funds From Operations
|
$ | 10,188 | $ | 6,183 | ||||
|
FFO and Adjusted FFO per share basic
|
$ | 0.51 | $ | 0.31 | ||||
|
FFO and Adjusted FFO per share diluted
|
$ | 0.50 | $ | 0.31 | ||||
|
Weighted average shares outstanding – basic
|
20,061,763 | 20,061,763 | ||||||
|
Weighted average shares outstanding – diluted
|
20,224,613 | 20,224,613 | ||||||
60
| ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Quantitative
and Qualitative Disclosures about Market Risk
Market risk includes risks that arise from changes in interest
rates, commodity prices, equity prices and other market changes
that affect market sensitive instruments. In pursuing our
business plan, we expect that the primary market risks to which
we will be exposed are real estate and interest rate risks.
Real
Estate Risk
The value of owned real estate, commercial mortgage assets and
net operating income derived from such properties are subject to
volatility and may be affected adversely by a number of factors,
including, but not limited to, national, regional and local
economic conditions which may be adversely affected by industry
slowdowns and other factors, local real estate conditions (such
as an oversupply of retail, industrial, office or other
commercial space), changes or continued weakness in specific
industry segments, construction quality, age and design,
demographic factors, retroactive changes to building or similar
codes, and increases in operating expenses (such as energy
costs). In the event net operating income decreases, or the
value of property held for sale decreases, a borrower may have
difficulty paying our rent or repaying our loans, which could
result in losses to us. Even when a property’s net
operating income is sufficient to cover the property’s debt
service, at the time an investment is made, there can be no
assurance that this will continue in the future.
The current turmoil in the residential mortgage market may
continue to have an effect on the commercial mortgage market and
real estate industry in general.
Interest
Rate Risk
Interest rate risk is highly sensitive to many factors,
including the availability of liquidity, governmental monetary
and tax policies, domestic and international economic and
political considerations and other factors beyond our control.
Our operating results will depend in large part on differences
between the income from assets in our real estate and mortgage
loan portfolio and our borrowing costs. At present, our
portfolio of variable rate mortgage loans is funded by our
equity as restrictive conditions in the securitized debt markets
have not enabled us to leverage the portfolio as we originally
intended. Accordingly, the income we earn on these loans is
subject to variability in interest rates. At current investment
levels, changes in one month LIBOR at the magnitudes listed
would have the following estimated effect on our annual income
from investments in loans (one month LIBOR was 0.23% at
December 31, 2009):
|
Increase/(decrease) in income
|
||||
|
from investments in loans
|
||||
| Increase/(Decrease) in interest rate* | (dollars in thousands) | |||
|
(20) basis points
|
$ | (28 | ) | |
|
Base interest rate
|
— | |||
|
+100 basis points
|
142 | |||
|
+200 basis points
|
284 | |||
|
+300 basis points
|
462 | |||
| * | Assumed one month LIBOR would not go below zero |
61
In the event of a significant rising interest rate environment
and/or
economic downturn, delinquencies and defaults could increase and
result in credit losses to us, which could adversely affect our
liquidity and operating results. Further, such delinquencies or
defaults could have an adverse effect on the spreads between
interest-earning assets and interest-bearing liabilities.
Our funding strategy involves utilizing asset-specific debt to
finance our real estate investments. Currently, the availability
of liquidity is constrained due to investor concerns over
dislocations in the debt markets, hedge fund losses, the large
volume of unsuccessful leveraged loan syndications and related
impact on the overall credit markets. These concerns have
materially impacted liquidity in the debt markets, making
financing terms for borrowers less attractive. We cannot foresee
when credit markets may stabilize and liquidity becomes more
readily available.
62
| ITEM 8. | Financial Statements and Supplementary Data |
Financial
Statements and Supplementary Data
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Care Investment
Trust Inc. and subsidiaries
New York, NY
We have audited the accompanying consolidated balance sheets of
Care Investment Trust Inc. and subsidiaries (the
“Company”) as of December 31, 2009 and 2008, and
the related consolidated statements of operations,
stockholders’ equity, and cash flows for the years ended
December 31, 2009 and 2008, and for the period from
June 22, 2007 (commencement of operations) to
December 31, 2007. Our audits also included the financial
statement schedules listed in the Index at Item 15. We also
have audited the Company’s internal control over financial
reporting as of December 31, 2009 based on criteria
established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company’s management is
responsible for these financial statements and financial
statement schedules, for maintaining effective internal control
over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on these financial statements and
financial statement schedules and an opinion on the
Company’s internal control over financial reporting based
on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers, or persons performing similar functions, and effected
by the company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of the Care Investment Trust and subsidiaries as of
December 31, 2009 and 2008, and the results of their
operations and their cash flows for the years ended
December 31, 2009 and 2008, and for the period from
June 22, 2007 (commencement of operations) to
December 31, 2007 in conformity with accounting principles
63
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the
information set forth therein. Also, in our opinion, the Company
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on
the criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
/s/
DELOITTE &
TOUCHE LLP
Parsippany, NJ
March 16, 2010
64
Care
Investment Trust Inc. and Subsidiaries
(dollars in
thousands — except share and per share data)
|
December 31,
|
December 31,
|
|||||||
| 2009 | 2008 | |||||||
|
Assets:
|
||||||||
|
Real Estate:
|
||||||||
|
Land
|
$ | 5,020 | $ | 5,020 | ||||
|
Buildings and improvements
|
101,000 | 101,524 | ||||||
|
Less: accumulated depreciation
|
(4,481 | ) | (1,414 | ) | ||||
|
Total real estate, net
|
101,539 | 105,130 | ||||||
|
Cash and cash equivalents
|
122,512 | 31,800 | ||||||
|
Investments in loans held at LOCOM
|
25,325 | 159,916 | ||||||
|
Investments in partially-owned entities
|
56,078 | 64,890 | ||||||
|
Accrued interest receivable
|
177 | 1,045 | ||||||
|
Deferred financing costs, net of accumulated amortization of
$1,122 and $432, respectively
|
713 | 1,402 | ||||||
|
Identified intangible assets — leases in place, net
|
4,471 | 4,295 | ||||||
|
Other assets
|
4,617 | 2,428 | ||||||
|
Total Assets
|
$ | 315,432 | $ | 370,906 | ||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Liabilities:
|
||||||||
|
Borrowings under warehouse line of credit
|
$ | — | $ | 37,781 | ||||
|
Mortgage notes payable
|
81,873 | 82,217 | ||||||
|
Accounts payable and accrued expenses
|
2,245 | 1,625 | ||||||
|
Accrued expenses payable to related party
|
544 | 3,793 | ||||||
|
Obligation to issue operating partnership units
|
2,890 | 3,045 | ||||||
|
Other liabilities
|
1,087 | 1,313 | ||||||
|
Total Liabilities
|
88,639 | 129,774 | ||||||
|
Commitments and Contingencies (Note 16)
|
||||||||
|
Stockholders’ Equity:
|
||||||||
|
Common stock: $0.001 par value, 250,000,000 shares
authorized, 21,159,647 and 21,021,359 shares issued,
respectively and 20,158,894 and 20,021,359 shares
outstanding, respectively
|
21 | 21 | ||||||
|
Treasury stock
|
(8,334 | ) | (8,330 | ) | ||||
|
Additional
paid-in-capital
|
301,926 | 299,656 | ||||||
|
Accumulated deficit
|
(66,820 | ) | (50,215 | ) | ||||
|
Total Stockholders’ Equity
|
226,793 | 241,132 | ||||||
|
Total Liabilities and Stockholders’ Equity
|
$ | 315,432 | $ | 370,906 | ||||
See Notes to Consolidated Financial Statements
65
Care
Investment Trust Inc. and Subsidiaries
(dollars in
thousands — except share and per share data)
|
Period from
|
||||||||||||
|
June 22, 2007
|
||||||||||||
|
Year Ended
|
Year Ended
|
(Commencement
|
||||||||||
|
December 31,
|
December 31,
|
of Operations) to
|
||||||||||
| 2009 | 2008 | December 31, 2007 | ||||||||||
|
Revenue
|
||||||||||||
|
Rental revenue
|
$ | 12,710 | $ | 6,228 | $ | — | ||||||
|
Income from investments in loans
|
7,135 | 15,794 | 11,209 | |||||||||
|
Other income
|
164 | 237 | 954 | |||||||||
|
Total Revenue
|
20,009 | 22,259 | 12,163 | |||||||||
|
Expenses
|
||||||||||||
|
Management fees to related party
|
2,235 | 4,105 | 2,625 | |||||||||
|
Marketing, general and administrative (including stock-based
compensation expense of $2,270, $1,212 and $9,459, respectively)
|
11,653 | 6,623 | 11,714 | |||||||||
|
Depreciation and amortization
|
3,375 | 1,554 | — | |||||||||
|
Realized (gain)/loss on loans sold
|
(1,064 | ) | 2,662 | — | ||||||||
|
Adjustment to valuation allowance on loans held at LOCOM
|
(4,046 | ) | 29,327 | — | ||||||||
|
Operating Expenses
|
12,153 | 44,271 | 14,339 | |||||||||
|
Other (Income) Expense
|
||||||||||||
|
Loss from investments in partially-owned entities
|
4,397 | 4,431 | — | |||||||||
|
Unrealized (income)/loss on derivative instruments
|
(153 | ) | 237 | — | ||||||||
|
Interest income
|
(73 | ) | (395 | ) | (753 | ) | ||||||
|
Interest expense, including amortization of deferred financing
costs
|
6,510 | 4,521 | 134 | |||||||||
|
Net Loss
|
$ | (2,826 | ) | $ | (30,806 | ) | $ | (1,557 | ) | |||
|
Loss per share of common stock
|
||||||||||||
|
Net loss, basic and diluted
|
$ | (0.14 | ) | $ | (1.47 | ) | $ | (0.07 | ) | |||
|
Weighted average common shares outstanding, basic and diluted
|
20,061,763 | 20,952,972 | 20,866,526 | |||||||||
See Notes to Consolidated Financial Statements.
66
Care
Investment Trust Inc. and Subsidiaries
Consolidated
Statement of Stockholders’ Equity
(dollars in
thousands, except share data)
| Common Stock |
Treasury
|
Additional
|
Accumulated
|
|||||||||||||||||||||
| Shares | $ | Stock | Paid in Capital | Deficit | Total | |||||||||||||||||||
|
Balance at June 22, 2007
(Commencement of Operations) |
100 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
|
Proceeds from public offering of common stock
|
15,000,000 | 15 | — | 224,985 | — | 225,000 | ||||||||||||||||||
|
Underwriting and offering costs
|
(14,837 | ) | — | (14,837 | ) | |||||||||||||||||||
|
Issuance of common stock for the acquisition of initial assets
from Manager
|
5,256,250 | 5 | — | 78,838 | — | 78,843 | ||||||||||||||||||
|
Stock-based compensation to Manager in common stock pursuant to
the Care Investment Trust, Inc. Manager equity plan
|
607,690 | 1 | — | 9,114 | — | 9,115 | ||||||||||||||||||
|
Stock-based compensation to non-employees in common stock
pursuant to the Care Investment Trust, Inc. Equity Plan
|
148,333 | — | — | 2,225 | — | 2,225 | ||||||||||||||||||
|
Unamortized portion of unvested common stock issued pursuant to
the Care Investment Trust Inc. Equity Plan
|
— | — | — | (1,943 | ) | — | (1,943 | ) | ||||||||||||||||
|
Stock-based compensation to directors for services rendered
|
5,215 | — | — | 62 | — | 62 | ||||||||||||||||||
|
Net loss for the period from June 22, 2007 (Commencement of
Operations) to December 31, 2007
|
— | — | — | — | (1,557 | ) | (1,557 | ) | ||||||||||||||||
|
Dividends declared and paid on common stock
|
— | — | — | — | (3,573 | ) | (3,573 | ) | ||||||||||||||||
|
Balance at December 31, 2007
|
21,017,588 | 21 | — | 298,444 | (5,130 | ) | 293,335 | |||||||||||||||||
|
Treasury stock purchased
|
(1,000,000 | ) | (8,330 | ) | — | — | (8,330 | ) | ||||||||||||||||
|
Stock-based compensation, fair value net of forfeitures
|
(22,000 | ) | — | — | 410 | — | 410 | |||||||||||||||||
|
Stock-based compensation to directors for services rendered
|
25,771 | — | — | 270 | — | 270 | ||||||||||||||||||
|
Warrants granted to manager
|
— | — | — | 532 | — | 532 | ||||||||||||||||||
|
Dividends declared and paid on common stock
|
— | — | — | — | (14,279 | ) | (14,279 | ) | ||||||||||||||||
|
Net loss
|
— | — | — | — | (30,806 | ) | (30,806 | ) | ||||||||||||||||
|
Balance, December 31, 2008
|
20,021,359 | $ | 21 | $ | (8,330 | ) | $ | 299,656 | $ | (50,215 | ) | $ | 241,132 | |||||||||||
|
Treasury stock purchased
|
(753 | ) | (4 | ) | — | — | (4 | ) | ||||||||||||||||
|
Stock-based compensation fair value
|
90,738 | — | — | 1,970 | — | 1,970 | ||||||||||||||||||
|
Stock-based compensation to directors for services rendered
|
47,550 | — | — | 300 | — | 300 | ||||||||||||||||||
|
Dividends declared and paid on common stock
|
— | — | — | — | (13,779 | ) | (13,779 | ) | ||||||||||||||||
|
Net loss
|
— | — | — | — | (2,826 | ) | (2,826 | ) | ||||||||||||||||
|
Balance, December 31, 2009
|
20,158,894 | $ | 21 | $ | (8,334 | ) | $ | 301,926 | $ | (66,820 | ) | $ | 226,793 | |||||||||||
See Notes to Consolidated Financial Statements
67
Care
Investment Trust Inc. and Subsidiaries
(dollars in
thousands)
|
For the Period
|
||||||||||||
|
For the Year
|
For the Year
|
June 22, 2007
|
||||||||||
|
Ended
|
Ended
|
(Commencement
|
||||||||||
|
December 31,
|
December 31,
|
of Operations) to
|
||||||||||
| 2009 | 2008 | December 31, 2007 | ||||||||||
|
Cash Flow From Operating Activities
|
||||||||||||
|
Net loss
|
$ | (2,826 | ) | $ | (30,806 | ) | $ | (1,557 | ) | |||
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
||||||||||||
|
Increase in deferred rent receivable
|
(2,411 | ) | (1,218 | ) | — | |||||||
|
Realized (gain)/loss on sale of loans
|
(1,064 | ) | 2,662 | (833 | ) | |||||||
|
Loss from investments in partially-owned entities
|
4,397 | 4,431 | — | |||||||||
|
Distribution of income from partially-owned entities
|
6,867 | 3,358 | — | |||||||||
|
Amortization of loan premium paid on investment in loans
|
1,530 | 1,927 | 507 | |||||||||
|
Amortization and write off of deferred financing cost
|
689 | 367 | 69 | |||||||||
|
Amortization of deferred loan fees
|
(247 | ) | (380 | ) | 149 | |||||||
|
Stock-based compensation to manager
|
— | — | 9,115 | |||||||||
|
Stock-based non-employee compensation
|
2,270 | 1,212 | 344 | |||||||||
|
Depreciation and amortization on real estate, including
intangible assets
|
3,415 | 1,554 | — | |||||||||
|
Unrealized (gain)/loss on derivative instruments
|
(153 | ) | 237 | — | ||||||||
|
Adjustment to valuation allowance on loans at LOCOM
|
(4,046 | ) | 29,327 | — | ||||||||
|
Changes in operating assets and liabilities:
|
||||||||||||
|
Accrued interest receivable
|
868 | 854 | (1,899 | ) | ||||||||
|
Other assets
|
220 | (14 | ) | (1,237 | ) | |||||||
|
Accounts payable and accrued expenses
|
620 | 116 | 4,628 | |||||||||
|
Other liabilities including payable to related party
|
(3,475 | ) | (598 | ) | 2,585 | |||||||
|
Net cash provided by operating activities
|
6,654 | 13,029 | 11,871 | |||||||||
|
Cash Flow From Investing Activities
|
||||||||||||
|
Purchase of initial assets from Manager
|
— | — | (204,272 | ) | ||||||||
|
Sale of loans to Manager
|
42,249 | — | — | |||||||||
|
Sale of loans to third parties
|
55,790 | — | — | |||||||||
|
Loan repayments
|
40,379 | 54,245 | 64,264 | |||||||||
|
Loan investments
|
— | (10,864 | ) | (17,805 | ) | |||||||
|
Investments in partially-owned entities
|
(2,452 | ) | (326 | ) | (69,503 | ) | ||||||
|
Investments in real estate
|
— | (110,980 | ) | — | ||||||||
|
Net cash provided by (used in) investing activities
|
135,966 | (67,925 | ) | (227,316 | ) | |||||||
|
Cash Flow From Financing Activities
|
||||||||||||
|
Proceeds from sale of common stock
|
— | — | 225,000 | |||||||||
|
Underwriting and offering costs
|
— | — | (14,837 | ) | ||||||||
|
Borrowing under mortgage notes payable
|
— | 82,227 | — | |||||||||
|
Principal payments under mortgage notes payable
|
(344 | ) | — | — | ||||||||
|
Borrowings under warehouse line of credit
|
— | 13,601 | 25,000 | |||||||||
|
Principal payments under warehouse line of credit
|
(37,781 | ) | (830 | ) | — | |||||||
|
Treasury stock purchases
|
(4 | ) | (8,330 | ) | — | |||||||
|
Payment of deferred financing costs
|
(1,012 | ) | (826 | ) | ||||||||
|
Dividends paid
|
( 13,779 | ) | ( 14,279 | ) | ( 3,573 | ) | ||||||
|
Net cash (used in) provided by financing activities
|
(51,908 | ) | 71,377 | 230,764 | ||||||||
|
Net increase in cash and cash equivalents
|
90,712 | 16,481 | 15,319 | |||||||||
|
Cash and cash equivalents, beginning of period
|
31,800 | 15,319 | — | |||||||||
|
Cash and cash equivalents, end of period
|
$ | 122,512 | $ | 31,800 | $ | 15,319 | ||||||
|
Supplemental Disclosure of Cash Flow Information
|
||||||||||||
|
Cash paid for interest
|
$ | 5,834 | $ | 4,181 | $ | 0.1 | ||||||
|
Issuance of Common Stock to Manager to purchase initial assets
|
$ | — | $ | — | $ | 78,843 | ||||||
|
Obligation to issue operating partnership units in connection
with the Cambridge Investment
|
$ | — | $ | — | $ | 2,850 | ||||||
See Notes to Consolidated Financial Statements
68
Care
Investment Trust Inc. and Subsidiaries — Notes to
Consolidated Financial Statements
December 31,
2009, December 31, 2008 and for the Period from
June 22, 2007
(Commencement of Operations) to December 31, 2007
(Commencement of Operations) to December 31, 2007
| Note 1 — | Organization |
Care Investment Trust Inc. (together with its subsidiaries,
the “Company” or “Care” unless otherwise
indicated or except where the context otherwise requires,
“we”, “us” or “our”) is a real
estate investment trust (“REIT”) with a geographically
diverse portfolio of senior housing and healthcare-related
assets in the United States. Care is externally managed and
advised by CIT Healthcare LLC (“Manager”). As of
December 31, 2009, this portfolio of assets consisted of
real estate and mortgage related assets for senior housing
facilities, skilled nursing facilities, medical office
properties and first mortgage liens on healthcare related
assets. Our owned senior housing facilities are leased, under
“triple-net”
leases, which require the tenants to pay all property-related
expenses.
Care elected to be taxed as a REIT under the Internal Revenue
Code commencing with our taxable year ended December 31,
2007. To maintain our tax status as a REIT, we are required to
distribute at least 90% of our REIT taxable income to our
stockholders. At present, Care does not have any taxable REIT
subsidiaries (“TRS”), but in the normal course of
business expects to form such subsidiaries as necessary.
| Note 2 — | Basis of Presentation and Significant Accounting Policies |
Basis of
Presentation
On December 10, 2009, our Board of Directors approved a
plan of liquidation and recommended that our shareholders
approve the plan of liquidation. On January 28, 2010, our
shareholders approved the plan of liquidation. Under the plan of
liquidation, the Board of Directors reserves the right to
continue to solicit and entertain proposals from third parties
to acquire all or substantially all of the company’s
outstanding common stock, prior to and after approval of the
plan of liquidation by our shareholders. We have entered into a
material definitive agreement for a sale of control of the
Company and have not pursued the plan of liquidation. Since it
is not probable that the Company would liquidate, the Company
has presented its financial statements on a going concern basis.
See Note 19.
Accounting
Standards Codification (“ASC”)
In June 2009, the Financial Accounting Standards Board
(“FASB”) issued a pronouncement establishing the FASB
Accounting Standards Codification as the source of authoritative
accounting principles recognized by the FASB to be applied in
the preparation of financial statements in conformity with GAAP.
The standard explicitly recognizes rules and interpretive
releases of the SEC under federal securities laws as
authoritative GAAP for SEC registrants. This standard is
effective for financial statements issued for fiscal years and
interim periods ending after September 15, 2009. The
Company adopted this standard in the third quarter of 2009.
Consolidation
The consolidated financial statements include our accounts and
those of our subsidiaries, which are wholly-owned or controlled
by us. All significant intercompany balances and transactions
have been eliminated.
Investments in partially-owned entities where the Company
exercises significant influence over operating and financial
policies of the subsidiary, but does not control the subsidiary,
are reported under the equity method of accounting. Generally
under the equity method of accounting, the Company’s share
of the investee’s earnings or loss is included in the
Company’s operating results.
Accounting Standards Codification 810
Consolidation
(“ASC 810”)
, requires a company to identify
investments in other entities for which control is achieved
through means other than voting rights (“variable interest
entities” or “VIEs”) and to determine which
business enterprise is the primary beneficiary of the VIE. A
variable interest entity is broadly defined as an entity where
either the equity investors as a group, if any, do not have a
controlling financial interest or the equity investment at risk
is insufficient to finance that entity’s activities without
additional subordinated financial support. The Company
consolidates investments in VIEs when it is determined that the
Company is the primary beneficiary of the VIE at either the
creation or the variable interest
69
entity or upon the occurrence of a reconsideration event. The
Company has concluded that neither of its partially-owned
entities are VIEs.
Segment
Reporting
Accounting Standards Codification 280
Segment Reporting
(“ASC 280”)
establishes standards for the way that
public entities report information about operating segments in
the financial statements. We are a REIT focused on originating
and acquiring healthcare-related real estate and commercial
mortgage debt and currently operate in only one reportable
segment.
Cash and
Cash Equivalents
We consider all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Included in cash and cash equivalents at December 31, 2009
and 2008, are approximately $1.1 million and
$1.3 million, respectively in customer deposits maintained
in an unrestricted account.
Real
Estate and Identified Intangible Assets
Real estate and identified intangible assets are carried at
cost, net of accumulated depreciation and amortization.
Betterments, major renewals and certain costs directly related
to the acquisition, improvement and leasing of real estate are
capitalized. Maintenance and repairs are charged to operations
as incurred. Depreciation is provided on a straight-line basis
over the assets’ estimated useful lives which range from 7
to 40 years.
Upon the acquisition of real estate, we assess the fair value of
acquired assets (including land, buildings and improvements, and
identified intangible assets such as above and below market
leases and acquired in-place leases and customer relationships)
and acquired liabilities in accordance Accounting Standards
Codification 805
Business Combinations (“ASC
805”)
, and Accounting Standards Codification
350-30
Intangibles — Goodwill and other (“ASC
350-30”)
,
and we allocate purchase price based on these assessments. We
assess fair value based on estimated cash flow projections that
utilize appropriate discount and capitalization rates and
available market information. Estimates of future cash flows are
based on a number of factors including the historical operating
results, known trends, and market/economic conditions that may
affect the property.
Our properties, including any related intangible assets, are
reviewed for impairment under ACS
360-10-35-15,
Impairment or Disposal of Long-Lived Assets
, (“ASC
360-10-35-15”)
if events or circumstances change indicating that the carrying
amount of the assets may not be recoverable. Impairment exists
when the carrying amount of an asset exceeds its fair value. An
impairment loss is measured based on the excess of the carrying
amount over the fair value. We have determined fair value by
using a discounted cash flow model and an appropriate discount
rate. The evaluation of anticipated cash flows is subjective and
is based, in part, on assumptions regarding future occupancy,
rental rates and capital requirements that could differ
materially from actual results. If our anticipated holding
periods change or estimated cash flows decline based on market
conditions or otherwise, an impairment loss may be recognized.
As of December 31, 2009, we have not recognized an
impairment loss.
Loans
Held at LOCOM
Valuation
Allowance on Loans Held at LOCOM
Investments in loans amounted to $25.3 million at
December 31, 2009. We account for our investment in loans
in accordance with Accounting Standards Codification 948
Financial Services — Mortgage Banking (“ASC
948”), which codified the FASB’s
Accounting for
Certain Mortgage Banking Activities
. Under ASC 948, loans
expected to be held for the foreseeable future or to maturity
should be held at amortized cost, and all other loans should be
held at the lower of cost or market (LOCOM), measured on an
individual basis. In accordance with ASC 820
Fair Value
Measurements and Disclosures
(“ASC 820”), the
Company includes nonperformance risk in calculating fair value
adjustments. As specified in ASC 820, the framework for
measuring fair value is based on independent observable inputs
of market data and follows the following hierarchy:
Level 1
— Quoted prices in active markets
for identical assets and liabilities.
70
Level 2
— Significant observable inputs
based on quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in
markets that are not active and model-based valuations for which
all significant assumptions are observable.
Level 3
— Significant unobservable inputs
that are supported by little or no market activity that are
significant to the fair value of the assets or liabilities.
At December 31, 2008, in connection with our decision to
reposition ourselves from a mortgage REIT to a traditional
direct property ownership REIT (referred to as an equity REIT,
see Notes 2, 4, and 5) and as a result of existing
market conditions, we transferred our portfolio of mortgage
loans to LOCOM because we are no longer certain that we will
hold the portfolio of loans either until maturity or for the
foreseeable future. Until December 31, 2008, we held our
loans until maturity, and therefore the loans had been carried
at amortized cost, net of unamortized loan fees, acquisition and
origination costs, unless the loans were impaired. In connection
with the transfer, we recorded an initial valuation allowance of
approximately $29.3 million representing the difference
between our carrying amount of the loans and their estimated
fair value at December 31, 2008. Interim assessments were
made of carrying values of the loan based on available data,
including sale and repayments on a quarterly basis during 2009.
Gains or losses on sales are determined by comparing proceeds to
carrying values based on interim assessments. At
December 31, 2009, the valuation allowance was reduced to
$8.4 million representing the difference between the
carrying amounts and estimated fair value of the Company’s
three remaining loans.
Coupon interest on the loans is recognized as revenue when
earned. Receivables are evaluated for collectibility if a loan
becomes more than 90 days past due. If fair value is lower
than amortized cost, changes in fair value (gains and losses)
are reported through our consolidated statement of operations
through a valuation allowance on loans held at LOCOM. Loans
previously written down may be written up based upon subsequent
recoveries in value, but not above their cost basis.
Expense for credit losses in connection with loan investments is
a charge to earnings to increase the allowance for credit losses
to the level that management estimates to be adequate to cover
probable losses considering delinquencies, loss experience and
collateral quality. Impairment losses are taken for impaired
loans based on the fair value of collateral on an individual
loan basis. The fair value of the collateral may be determined
by an evaluation of operating cash flow from the property during
the projected holding period,
and/or
estimated sales value computed by applying an expected
capitalization rate to the stabilized net operating income of
the specific property, less selling costs. Whichever method is
used, other factors considered relate to geographic trends and
project diversification, the size of the portfolio and current
economic conditions. Based upon these factors, we will establish
an allowance for credit losses when appropriate. When it is
probable that we will be unable to collect all amounts
contractually due, the loan is considered impaired.
Investment
in Partially-Owned Entities
We invest in preferred equity interests that allow us to
participate in a percentage of the underlying property’s
cash flows from operations and proceeds from a sale or
refinancing. At the inception of the investment, we must
determine whether such investment should be accounted for as a
loan, joint venture or as real estate. Care invested in two
equity investments as of December 31, 2009 and accounts for
such investments as a joint venture.
The Company assesses whether there are indicators that the value
of its partially owned entities may be impaired. An
investment’s value is impaired if the Company determines
that a decline in the value of the investment below its carrying
value is other than temporary. To the extent impairment has
occurred, the loss shall be measured as the excess of the
carrying amount of the investment over the estimated value of
the investment. As of December 31, 2009, the Company has
not recognized any impairment on our partially owned entities.
Comprehensive
Income
The Company has no items of other comprehensive income, and
accordingly net loss is equal to comprehensive loss for all
periods presented.
71
Revenue
Recognition
Interest income on investments in loans is recognized over the
life of the investment on the accrual basis. Fees received in
connection with loans are recognized over the term of the loan
as an adjustment to yield. Anticipated exit fees whose
collection is expected will also be recognized over the term of
the loan as an adjustment to yield. Unamortized fees are
recognized when the associated loan investment is repaid before
maturity on the date of such repayment. Premium and discount on
purchased loans are amortized or accreted on the effective yield
method over the remaining terms of the loans.
Income recognition will generally be suspended for loan
investments at the earlier of the date at which payments become
90 days past due or when, in our opinion, a full recovery
of income and principal becomes doubtful. Income recognition is
resumed when the loan becomes contractually current and
performance is demonstrated to be resumed. For the years ended
December 31, 2009 and 2008, we have no loans for which
income recognition has been suspended.
The Company recognizes rental revenue in accordance with
Accounting Standards Codification 840 Leases (“ASC
840”). ASC 840 requires that revenue be recognized on a
straight-line basis over the non-cancelable term of the lease
unless another systematic and rational basis is more
representative of the time pattern in which the use benefit is
derived from the leased property. Renewal options in leases with
rental terms that are lower than those in the primary term are
excluded from the calculation of straight line rent if the
renewals are not reasonably assured. We commence rental revenue
recognition when the tenant takes control of the leased space.
The Company recognizes lease termination payments as a component
of rental revenue in the period received, provided that there
are no further obligations under the lease.
Deferred
Financing Costs
Deferred financing costs represent commitment fees, legal and
other third party costs associated with obtaining commitments
for financing which result in a closing of such financing. These
costs are amortized over the terms of the respective agreements
on the effective interest method and the amortization is
reflected in interest expense. Unamortized deferred financing
costs are expensed when the associated debt is refinanced or
repaid before maturity. Costs incurred in seeking financing
transactions which do not close are expensed in the period in
which it is determined that the financing will not close.
Stock-based
Compensation Plans
We have two stock-based compensation plans, described more fully
in Note 14. We account for the plans using the fair value
recognition provisions of
505-50
Equity-Based Payments to Non-Employees
(“ASC
505-50”)
and ASC 718 —
Compensation — Stock
Compensation
(“ASC 718”). ASC
505-50
and
ASC 718 requires that compensation cost for stock-based
compensation be recognized ratably over the service period of
the award. Because all of our stock-based compensation is issued
to non-employees and board members, the amount of compensation
is to be adjusted in each subsequent reporting period based on
the fair value of the award at the end of the reporting period
until such time as the award has vested or the service being
provided is substantially completed or, under certain
circumstances, likely to be completed, whichever occurs first.
Derivative
Instruments
We account for derivative instruments in accordance with
Accounting Standards Codification 815
Derivatives and Hedging
(“ASC 815”). In the normal course of business, we
may use a variety of derivative instruments to manage, or hedge,
interest rate risk. We will require that hedging derivative
instruments be effective in reducing the interest rate risk
exposure they are designated to hedge. This effectiveness is
essential for qualifying for hedge accounting. Some derivative
instruments may be associated with an anticipated transaction.
In those cases, hedge effectiveness criteria also require that
it be probable that the underlying transaction will occur.
Instruments that meet these hedging criteria will be formally
designated as hedges at the inception of the derivative contract.
To determine the fair value of derivative instruments, we may
use a variety of methods and assumptions that are based on
market conditions and risks existing at each balance sheet date.
For the majority of financial instruments
72
including most derivatives, long-term investments and long-term
debt, standard market conventions and techniques such as
discounted cash flow analysis, option-pricing models,
replacement cost, and termination cost are likely to be used to
determine fair value. All methods of assessing fair value result
in a general approximation of fair value, and such value may
never actually be realized.
We may use a variety of commonly used derivative products that
are considered “plain vanilla” derivatives. These
derivatives typically include interest rate swaps, caps, collars
and floors. We expressly prohibit the use of unconventional
derivative instruments and using derivative instruments for
trading or speculative purposes. Further, we have a policy of
only entering into contracts with major financial institutions
based upon their credit ratings and other factors, so we do not
anticipate nonperformance by any of our counterparties.
We may employ swaps, forwards or purchased options to hedge
qualifying forecasted transactions. Gains and losses related to
these transactions are deferred and recognized in net income as
interest expense in the same period or periods that the
underlying transaction occurs, expires or is otherwise
terminated.
Hedges that are reported at fair value and presented on the
balance sheet could be characterized as either cash flow hedges
or fair value hedges. For derivative instruments not designated
as hedging instruments, the gain or loss resulting from the
change in the estimated fair value of the derivative instruments
will be recognized in current earnings during the period of
change.
Income
Taxes
We have elected to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code. To qualify as a REIT,
we must meet certain organizational and operational
requirements, including a requirement to distribute at least 90%
of our REIT taxable income to stockholders. As a REIT, we
generally will not be subject to federal income tax on taxable
income that we distribute to our stockholders. If we fail to
qualify as a REIT in any taxable year, we will then be subject
to federal income tax on our taxable income at regular corporate
rates and we will not be permitted to qualify for treatment as a
REIT for federal income tax purposes for four years following
the year during which qualification is lost unless the Internal
Revenue Service grants us relief under certain statutory
provisions. Such an event could materially adversely affect our
net income and net cash available for distributions to
stockholders. However, we believe that we will operate in such a
manner as to qualify for treatment as a REIT and we intend to
operate in the foreseeable future in such a manner so that we
will qualify as a REIT for federal income tax purposes. We may,
however, be subject to certain state and local taxes.
In July 2006, the FASB issued Interpretation No. 48
“Accounting for Uncertainty in Income Taxes — An
Interpretation of FASB Statement No. 109”
(“FIN 48”). ASC 740 prescribes a recognition
threshold and measurement attribute for how a company should
recognize, measure, present, and disclose in its financial
statements uncertain tax positions that the company has taken or
expects to take on a tax return. ASC 740 requires that the
financial statements reflect expected future tax consequences of
such positions presuming the taxing authorities’ full
knowledge of the position and all relevant facts, but without
considering time values. ASC 740 was adopted by the Company
and became effective beginning January 1, 2007. The
implementation of ASC 740 has not had a material impact on the
Company’s consolidated financial statements.
Underwriting
Commissions and Costs
Underwriting commissions and costs incurred in connection with
our initial public offering are reflected as a reduction of
additional
paid-in-capital.
Organization
Costs
Costs incurred to organize Care have been expensed as incurred.
Earnings
per Share
We present basic earnings per share or EPS in accordance with
ASC 260,
Earnings per Share
. We also present diluted EPS,
when diluted EPS is lower than basic EPS. Basic EPS excludes
dilution and is computed by dividing net income by the weighted
average number of common shares outstanding during the period.
Diluted EPS reflects
73
the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock, where such exercise or conversion would result in
a lower EPS amount. At December 31, 2009 and 2008, diluted
EPS was the same as basic EPS because all outstanding restricted
stock awards were anti-dilutive. The operating partnership units
issued in connection with an investment (See
Note 6) are in escrow and do not impact EPS.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the
accompanying notes. Significant estimates are made for the
valuation allowance on loans held at LOCOM, valuation of
derivatives and impairment assessments. Actual results could
differ from those estimates.
Concentrations
of Credit Risk
Financial instruments that potentially subject us to
concentrations of credit risk consist primarily of cash
investments, real estate, loan investments and interest
receivable. We may place our cash investments in excess of
insured amounts with high quality financial institutions. We
perform ongoing analysis of credit risk concentrations in our
real estate and loan investment portfolios by evaluating
exposure to various markets, underlying property types,
investment structure, term, sponsors, tenant mix and other
credit metrics. The collateral securing our loan investments are
real estate properties located in the United States.
Recent
Accounting Pronouncements
Noncontrolling
Interests in Consolidated Financial Statements
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements
which was codified in FASB ASC 810
Consolidation
(“ASC 810”). ASC 810 requires that a
noncontrolling interest in a subsidiary be reported as equity
and the amount of consolidated net income specifically
attributable to the noncontrolling interest be identified in the
consolidated financial statements. It also calls for consistency
in the manner of reporting changes in the parent’s
ownership interest and requires fair value measurement of any
noncontrolling equity investment retained in a deconsolidation.
ASC 810 is effective for the Company on January 1, 2009.
The Company records its investments using the equity method and
does not consolidate these joint ventures. As such, there is no
impact upon adoption of ASC 810 on its consolidated financial
statements.
Disclosures
about Derivative Instruments and Hedging
Activities
On March 20, 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities,
which is codified in FASB ASC 815
Derivatives
and Hedging Summary
(“ASC 815”). The derivatives
disclosure pronouncement provides for enhanced disclosures about
how and why an entity uses derivatives and how and where those
derivatives and related hedged items are reported in the
entity’s financial statements. ASC 815 also requires
certain tabular formats for disclosing such information. ASC 815
applies to all entities and all derivative instruments and
related hedged items accounted for under this new pronouncement.
Among other things, ASC 815 requires disclosures of an
entity’s objectives and strategies for using derivatives by
primary underlying risk and certain disclosures about the
potential future collateral or cash requirements (that is, the
effect on the entity’s liquidity) as a result of contingent
credit-related features. ASC 815 is effective for the Company on
January 1, 2009. The Company adopted ASC 815 in the first
quarter of 2009 and included disclosures in its consolidated
financial statements addressing how and why the Company uses
derivative instruments, how derivative instruments are accounted
for and how derivative instruments affect the Company’s
financial position, financial performance, and cash flows. (See
Note 9)
Disclosures
about Fair Value of Financial Instruments
In April 2009, the FASB issued
FSP 107-1
and APB
28-1,
Interim Disclosures about Fair Value of Financial Instruments
codified in FASB ASC 820
Fair Value Measurements and
Disclosures
(“ASC 820”). ASC 820 amends
74
SFAS No. 107,
Disclosures about Fair Value of
Financial Instruments
and APB 28
Interim Financial
Reporting
by requiring an entity to provide qualitative and
quantitative information on a quarterly basis about fair value
estimates for any financial instruments not measured on the
balance sheet at fair value. The Company adopted the disclosure
requirements of ASC 820 in the quarter ended June 30, 2009.
In June 2009, issued ASU
2009-17
to
codify FASB issued Statement No. 167, “
Amendments
to FASB Interpretation No. 46(R)
” as ASC 810
(“ASC 810”), with the objective of improving financial
reporting by entities involved with variable interest entities
(VIE). It retains the scope of FIN 46(R) with the addition
of entities previously considered qualifying special-purpose
entities, as the concept of those entities was eliminated by
FASB Statement No. 166, “
Accounting for Transfers
of Financial Assets
” (ASU
2009-16;
FASB ASC 860). ASC 810 will require an analysis to determine
whether the entity’s variable interest or interests give it
a controlling financial interest in a VIE.
On September 30, 2009, the FASB issued ASU
2009-12
to
provide guidance on measuring the fair value of certain
alternative investments. The ASU amends ASC 820 to offer
investors a practical expedient for measuring the fair value of
investments in certain entities that calculate net asset value
per share. The ASU is effective for the first reporting period
(including interim periods) ending after December 15, 2009
with early adoption permitted.
On January 21, 2010, the FASB issued ASU
2010-06,
which amends ASC 820 to add new requirements for disclosures
about transfers into and out of Levels 1 and 2 and separate
disclosures about purchases, sales, issuances, and settlements
relating to Level 3 measurements. The ASU also clarifies
existing fair value disclosures about the level of
disaggregation and about inputs and valuation techniques used to
measure fair value. The ASU is effective for the first reporting
period (including interim periods) beginning after
December 15, 2009, except for the requirement to provide
the Level 3 activity of purchases, sales, issuances, and
settlements on a gross basis, which will be effective for fiscal
years beginning after December 15, 2010, and for interim
periods within those fiscal years, with early adoption permitted.
Subsequent
Events
In May 2009, the FASB issued SFAS 165
Subsequent
Events
, which is codified in FASB ASC 855,
Subsequent
E
vents (“ASC 855”). ASC 855 introduces the concept
of financial statements being available to be issued. It
requires the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date, that
is, whether that date represents the date the financial
statements were issued or were available to be issued. The
pronouncement is effective for interim periods ending after
June 15, 2009. The Company adopted ASC 855 in the 2009
second quarter. The Company evaluates subsequent events as of
the date of issuance of its financial statements and considers
the impact of all events that have taken place to that date in
its disclosures and financials statements when reporting on the
Company’s financial position and results of operations. The
Company has evaluated subsequent events through the date of
filing and has determined that no other events need to be
disclosed.
| Note 3 — | Real Estate Properties |
On June 26, 2008, we purchased twelve senior living
properties for approximately $100.8 million from Bickford
Senior Living Group LLC, an unaffiliated party. Concurrent with
the purchase, we leased these properties to Bickford
Master I, LLC (the “Master Lessee” or
“Bickford”), for initial annual base rent of
$8.3 million and additional base rent of $0.3 million,
with fixed escalations of 3% for 15 years. The leases
contain an option of four renewals of ten years each. The
additional base rent is deferred and accrues for the first three
years and then is paid starting with the first month of the
fourth year. We funded this acquisition using cash on hand and
mortgage borrowings of $74.6 million.
On September 30, 2008, we purchased two additional senior
living properties for approximately $10.3 million from
Bickford Senior Living Group LLC. Concurrent with the purchase,
we leased these properties back to Bickford for initial annual
base rent of $0.8 million and additional base rent of
$0.03 million with fixed escalations of 3% for
14.75 years. The leases contain an option of four renewals
of ten years each. The additional base rent is deferred and
accrues for the first three years and then is paid starting with
the first month of the fourth year. We funded this acquisition
using cash on hand and mortgage borrowings of $7.6 million.
75
At each acquisition, we completed a preliminary assessment of
the allocation of the fair value of the acquired assets
(including land, buildings, equipment and in-place leases) in
accordance with ASC 805
Business Combinations
, and
ASC 350
Intangibles — Goodwill and Other
.
Based upon that assessment, the final allocation of the purchase
price to the fair values of the assets acquired is as follows
(in millions):
|
Buildings, improvements and equipment
|
$ | 95.1 | ||
|
Furniture, fixtures and equipment
|
5.9 | |||
|
Land
|
5.0 | |||
|
Identified intangibles — leases in-place (Note 7)
|
5.0 | |||
| $ | 111.0 | |||
Additionally, as part of the June 26, 2008 transaction we
sold back a property acquired from Bickford Senior Living Group,
LLC that was acquired on March 31, 2008 at its net carrying
amount, which did not result in a gain or a loss to the Company.
As of December 31, 2009, the properties owned by Care, and
leased to Bickford were 100% managed or operated by Bickford
Senior Living Group, LLC. As an enticement for the Company to
enter into the leasing arrangement for the properties, Care
received additional collateral and guarantees of the lease
obligation from parties affiliated with Bickford who act as
subtenants under the master lease. The additional collateral
pledged in support of Bickford’s obligation to the lease
commitment included properties and ownership interests in
affiliated companies of the subtenants.
Future minimum annual rental revenue under the non-cancelable
terms of the Company’s operating leases at
December 31, 2009 are as follows (in thousands):
|
2010
|
$ | 9,527 | ||
|
2011
|
10,176 | |||
|
2012
|
10,874 | |||
|
2013
|
10,974 | |||
|
2014
|
11,062 | |||
|
Thereafter
|
108,434 | |||
| $ | 161,047 | |||
| Note 4 — | Investment in Loans Held at LOCOM |
As of December 31, 2009 and December 31, 2008, our net
investments in loans amounted to $25.3 million and
$159.9 million, respectively. During the years ended
December 31, 2009 and 2008, we received $138.4 million
and $54.2 million in principal repayments and proceeds from
the loan sales and recognized $1.5 million and
$1.9 million, respectively in amortization of the premium
we paid for the purchase of our initial assets as a reduction of
interest income. Our investments include senior whole loans and
participations secured primarily by real estate in the form of
pledges of ownership interests, direct liens or other security
interests. The investments are in various geographic markets in
the United States. These investments are all variable rate at
December 31, 2009 and had a weighted average spread of
6.76% and 5.76% over one month LIBOR and have an average
maturity of approximately 1.0 and 2.1 years at
December 31, 2009 and 2008, respectively. Some loans are
subject to interest rate floors. The effective yield on the
portfolio was 6.99%, 6.20% and 8.22%, respectively for the years
ended December 31, 2009 and December 31, 2008 and for
the period from June 22, 2007 (commencement of operations)
to December 31, 2007. One month LIBOR was 0.23% and 0.45%
at December 31, 2009 and December 31, 2008,
respectively.
76
December 31,
2009
| Location |
Cost
|
Interest
|
Maturity
|
|||||||||
| Property Type(a) | City | State | Basis (000s) | Rate | Date | |||||||
|
SNF/ALF(e)(k)
|
Nacogdoches | Texas | 9,338 | L+3.15% | 10/02/11 | |||||||
|
SNF/Sr.Appts/ALF
|
Various | Texas/Louisiana | 14,226 | L+4.30% | 02/01/11 | |||||||
|
SNF(e)(g)
|
Various | Michigan | 10,178 | L+7.00% | 02/19/10 | |||||||
|
Investment in loans, gross
|
$ | 33,742 | ||||||||||
|
Valuation allowance
|
(8,417 | ) | ||||||||||
|
Loans held at LOCOM
|
$ | 25,325 | ||||||||||
At the conclusion of 2008, upon considering changes in our
strategies and changes in the marketplace discussed in
Note 2, we transferred our portfolio of mortgage loans to
the lower of cost or market in the December 31, 2008
financial statements because we were not certain that we would
hold the portfolio of loans either until maturity or for the
foreseeable future. The transfer resulted in a charge to
earnings of $29.3 million.
December 31,
2008
| Location |
Cost
|
Interest
|
Maturity
|
|||||||||
| Property Type(a) | City | State | Basis (000s) | Rate | Date | |||||||
|
SNF(h)
|
Middle River | Maryland | $ | 9,185 | L+3.75% | 03/31/11 | ||||||
|
SNF/ALF/IL(j)
|
Various | Washington/Oregon | 26,012 | L+2.75% | 10/04/11 | |||||||
|
SNF(b)(d)/(e)
|
Various | Michigan | 23,767 | L+2.25% | 03/26/12 | |||||||
|
SNF(d)/(e)(h)
|
Various | Texas | 6,540 | L+3.00% | 06/30/11 | |||||||
|
SNF(d)/(e)(h)
|
Austin | Texas | 4,604 | L+3.00% | 05/30/11 | |||||||
|
SNF(b)(d)(e)
|
Various | Virginia | 27,401 | L+2.50% | 03/01/12 | |||||||
|
SNF/ICF(d)/(e)(f)
|
Various | Illinois | 29,045 | L+3.00% | 10/31/11 | |||||||
|
SNF(d)/(e)/(f)
|
San Antonio | Texas | 8,412 | L+3.50% | 02/09/11 | |||||||
|
SNF/ALF(d)/(e)
|
Nacogdoches | Texas | 9,696 | L+3.15% | 10/02/11 | |||||||
|
SNF/Sr.Appts/ALF
|
Various | Texas/Louisiana | 15,682 | L+4.30% | 02/01/11 | |||||||
|
ALF(b)(e)
|
Daytona Beach | Florida | 3,688 | L+3.43% | 08/11/11 | |||||||
|
SNF/IL(c)/(d)/(e)(h)
|
Georgetown | Texas | 5,980 | L+3.00% | 07/31/09 | |||||||
|
SNF(i)
|
Aurora | Colorado | 9,151 | L+5.74% | 08/04/10 | |||||||
|
SNF(e)
|
Various | Michigan | 10,080 | L+7.00% | 02/19/10 | |||||||
|
Investment in loans, gross
|
$ | 189,243 | ||||||||||
|
Valuation allowance
|
(29,327 | ) | ||||||||||
|
Loans held at LOCOM
|
$ | 159,916 | ||||||||||
| (a) | SNF refers to skilled nursing facilities; ALF refers to assisted living facilities; ICF refers to intermediate care facility; and Sr. Appts refers to senior living apartments. | |
| (b) | Loans sold to Manager in 2009 at amounts equal to appraised fair value for an aggregate amount of $42.2 million. (See Note 5) | |
| (c) | Borrower extended the maturity date to July 31, 2012 during the second quarter of 2009. | |
| (d) | Pledged as collateral for borrowings under our warehouse line of credit as of December 31, 2008. On March 9, 2009, Care repaid the outstanding borrowings on its warehouse line in full. | |
| (e) | The mortgages are subject to various interest rate floors ranging from 6.00% to 11.5%. | |
| (f) | Loan prepaid in 2009 at amounts equal to remaining principal for each respective loan. | |
| (g) | Loan repaid at maturity in February 2010 for approximately $10.0 million, see Note 19 | |
| (h) | Loans sold to a third party in September 2009 for an aggregate amount of $24.8 million | |
| (i) | Loan sold to a third party in October 2009 for approximately $8.5 million. | |
| (j) | Loans sold to a third party in November 2009 for aggregate proceeds of approximately $22.4 million. | |
| (k) | Loan sold to a third party in March 2010 for approximately $6.1 million of cash proceeds before selling costs |
77
Our mortgage portfolio (gross) at December 31, 2009 is
diversified by property type and U.S. geographic region as
follows (in millions of dollars):
|
December 31,
|
||||||||
| 2009 | ||||||||
|
Cost
|
% of
|
|||||||
|
By Property Type
|
Basis | Portfolio | ||||||
|
Skilled Nursing
|
$ | 10.2 | 30.2 | % | ||||
|
Mixed-use
(1)
|
23.5 | 69.8 | % | |||||
|
Total
|
$ | 33.7 | 100.0 | % | ||||
|
December 31,
|
||||||||
| 2009 | ||||||||
|
Cost
|
% of
|
|||||||
|
By U.S. Geographic Region
|
Basis | Portfolio | ||||||
|
Midwest
|
$ | 10.2 | 30.2 | % | ||||
|
South
|
23.5 | 69.8 | % | |||||
| $ | 33.7 | 100.0 | % | |||||
| (1) | Mixed-use facilities refer to properties that provide care to different segments of the elderly population based on their needs, such as Assisted Living with Skilled Nursing capabilities. |
During the year ended December 31, 2009, the Company
received proceeds of $37.5 million related to the
prepayment of balances related to two mortgage loans and
received proceeds of $42.2 million related to sales to its
Manager. In addition, during the year ended December 31,
2009, the Company received $55.8 million related to sales
of mortgage loans to third parties. See Note 13 for a roll
forward of the investment held at fair value from
December 31, 2008 to December 31, 2009. As of
December 31, 2009, our portfolio of three mortgages was
extended to five borrowers. Two of those three mortgage loans
were sold or repaid in 2010 as indicated in (g) and (k),
above. As of December 31, 2008, our portfolio of eighteen
mortgages was extended to fourteen borrowers with the largest
exposure to any single borrower at 20.9% of the carrying value
of the portfolio. The carrying value of three loans, each to
different borrowers with exposures of more than 10% of the
carrying value of the total portfolio, amounted to 54.9% of the
portfolio.
| Note 5 — | Sales of Investments in Loans Held at LOCOM |
On September 30, 2008 we finalized a Mortgage Purchase
Agreement (the “Agreement”) with our Manager that
provided us an option to sell loans from our investment
portfolio to our Manager at the loan’s fair value on the
sale date. See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations —
Liquidity and Capital Resources” for a discussion of the
terms and conditions of the Agreement. Pursuant to the
agreement, we sold loans in 2008 and 2009 as discussed below.
Pursuant to the agreement, we sold a loan with a carrying amount
of approximately $24.8 million in November 2009. We incurred a
loss on the sale of $2.4 million.
On February 3, 2009, we sold one loan with a net carrying
amount of approximately $22.5 million as of
December 31, 2008. Proceeds from the sale approximated the
net carrying value of $22.5 million. We incurred a loss of
$4.9 million on the sale of this loan. The loss on this
loan was included in the valuation allowance on the loans held
at LOCOM at December 31, 2008. On August 19, 2009, we
sold two mortgage loans with a net carrying value of
approximately $2.9 million as of December 31, 2008.
Proceeds from the sale of those two mortgage loans approximated
the net carrying value as of June 30, 2009 of
$2.3 million. On September 16, 2009, we sold interests
in a participation loan in Michigan with a net carrying value of
approximately $19.7 million as of December 31, 2008
and reduced to $18.7 million at the time of sale as a
result of principal paydown. Proceeds from the sale of the
interests in the participation loan were approximately
$17.4 million or approximately $1.3 million less than
the net carrying value. All of these loans were sold under the
Mortgage Purchase Agreement (the “Agreement”) with our
Manager, which was finalized in 2008 and provided us an option
to sell loans from our investment portfolio to our Manager at
the loan’s fair value on the sale date. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and
Capital Resources” for a discussion of the terms and
conditions of the Agreement.
On September 15, 2009, we sold four mortgage loans to a
third party with a net carrying value of approximately
$22.8 million as of December 31, 2008 and
$22.4 million as of June 30, 2009. Proceeds from the
sale of these four mortgage loans were approximately
$24.8 million or approximately $2.4 million above the
net carrying value. On October 6, 2009, we sold one
mortgage loan with a net carrying value of $8.2 million as
of December 31, 2008 and an adjusted value of
$8.4 million as of June 30, 2009. Proceeds from the
sale of this mortgage loan were approximately $8.5 million
or approximately $0.1 million above the net carrying value.
On November 12, 2009, we sold one mortgage
78
loan to a third party with a net carrying value of approximately
$19.3 million as of December 31, 2008 and an adjusted
value of $19.9 million as of June 30, 2009. Proceeds
from the sale of this mortgage loan were approximately
$22.4 million or approximately $2.5 million above the
net carrying value.
| Note 6 — | Investment in Partially-Owned Entities |
On December 31, 2007, Care, through its subsidiary ERC Sub,
L.P., purchased an 85% equity interest in eight limited
liability entities owning nine medical office buildings with a
value of $263.0 million for $61.9 million in cash
including the funding of certain reserve requirements. The
Seller was Cambridge Holdings Incorporated
(“Cambridge”) and the interests were acquired through
a “DownREIT” partnership subsidiary, i.e., ERC Sub,
L.P. The transaction also provided for the issuance of 700,000
operating partnership units to Cambridge subject to future
performance of the underlying properties. These units were
issued by us into escrow and will be released to Cambridge
subject to the acquired properties meeting certain performance
benchmarks. Based on the expected timing of the release of the
operating partnership units from escrow, the fair value of the
operating partnership units was $2.9 million and
$3.0 million on December 31, 2009 and 2008,
respectively. At December 31, 2014, each operating
partnership unit held in escrow at that time is redeemable into
one share of the Company’s common stock, subject to certain
conditions. The Company has the option to pay cash or issue
shares of company stock upon redemption.
In accordance with ASC 820, the obligation to issue operating
partnership units is accounted for as a derivative instrument.
Accordingly, the value of the obligation to issue the operating
partnership units is reflected as a liability on the
Company’s balance sheet and accordingly will be remeasured
every period until the operating partnership units are released
from escrow.
Care will receive an initial preferred minimum return of 8.0% on
capital invested at close with 2.0% per annum escalations until
certain portfolio performance metrics are achieved. As of
December 31, 2009, the entities now owned with Cambridge
carry $178.6 million in asset-specific mortgage debt which
mature no earlier than the fourth quarter of 2016 and bear a
weighted average fixed interest rate of 5.86%.
The Cambridge portfolio contains approximately
767,000 square feet and is located in major metropolitan
markets in Texas (8) and Louisiana (1). The properties are
situated on leading medical center campuses or adjacent to
prominent acute care hospitals or ambulatory surgery centers.
Affiliates of Cambridge will act as managing general partners of
the entities that own the properties, as well as manage and
lease these facilities.
Summarized financial information as of December 31, 2009
and 2008, for the Company’s unconsolidated joint venture in
Cambridge is as follows (amounts in millions):
|
2009
|
2008
|
|||||||
| Amount | Amount | |||||||
|
Assets
|
$ | 226.4 | $ | 238.0 | ||||
|
Liabilities
|
190.5 | 192.3 | ||||||
|
Equity
|
35.9 | 45.7 | ||||||
|
Revenue
|
24.8 | 24.1 | ||||||
|
Expenses
|
31.4 | 30.6 | ||||||
|
Net loss
|
(6.6 | ) | (6.5 | ) | ||||
On December 31, 2007, the Company also formed a joint
venture, SMC-CIT Holding Company, LLC, with an affiliate of
Senior Management Concepts, LLC to acquire four independent and
assisted living facilities located in Utah. Total capitalization
of the joint venture is $61.0 million. Care invested
$6.8 million in exchange for 100% of the preferred equity
interests and 10% of the common equity interests of the joint
venture. The Company will receive a preferred return of 15% on
its invested capital and an additional common equity return
equal to 10% of the projected free cash flow after payment of
debt service and the preferred return. Subject to certain
conditions being met, our preferred equity interest is subject
to redemption at par beginning on January 1, 2010. We
retain an option to put our preferred equity interest to our
partner at par any time beginning on January 1, 2016. If
our preferred equity interest is redeemed, we have the right to
put our common equity interests to our partner within thirty
days after notice at fair market value as determined by a
third-party appraiser. Affiliates of Senior Management Concepts,
LLC have leased the facilities from the joint venture for
15 years, expiring in 2022. Care accounts for its
investment in SMC-CIT Holding Company, LLC under the equity
method.
79
The four facilities contain 243 independent living units and 165
assisted living units. The properties were constructed in the
last 25 years, and two were built in the last
10 years. Since both transactions closed on
December 31, 2007, the Company recorded no income or loss
on these investments for the period from June 22, 2007
(commencement of operations) to December 31, 2007.
For the years ended December 31, 2009 and December 31,
2008, our equity in the loss of our Cambridge portfolio amounted
to $5.6 million and $5.6 million, respectively, which
included $9.6 million and $9.4 million, respectively,
attributable to our share of the depreciation and amortization
expenses associated with the Cambridge properties. The
Company’s investment in the Cambridge entities was
$49.3 million and $58.1 million at December 31,
2009 and 2008, respectively. During the years ended
December 31, 2009 and December 31, 2008, we received
$5.8 million and $2.2 million in distributions from
our investment in Cambridge.
For the years ended December 31, 2009 and December 31,
2008, we recognized $1.2 million and $1.1 million,
respectively, in equity income from our interest in SMC and
received $1.2 million and $1.1 million in
distributions, respectively.
| Note 7 — | Identified Intangible Assets — leases in-place, net |
The following table summarizes the Company’s identified
intangible assets as of December 31, 2009:
| Identified intangibles — leases in-place (amounts in thousands ) | ||||
|
Gross amount
|
$ | 4,960 | ||
|
Accumulated amortization
|
(489 | ) | ||
| $ | 4,471 | |||
The estimated annual amortization of acquired in-place leases
for each of the succeeding years as of December 31, 2008 is
as follows: (amounts in thousands
)
|
2010
|
331 | |||
|
2011
|
331 | |||
|
2012
|
331 | |||
|
2013
|
331 | |||
|
2013
|
331 | |||
|
Thereafter
|
2,816 |
The Company amortizes this intangible asset over the life of the
leases on a straight-line basis.
| Note 8 — | Other Assets |
Other assets at December 31, 2009 and 2008 consisted of the
following (amounts in thousands
)
:
|
December 31
|
December 31
|
|||||||
| 2009 | 2008 | |||||||
|
Straight-line effect of lease revenue
|
$ | 3,628 | $ | 1,218 | ||||
|
Prepaid expenses
|
722 | 390 | ||||||
|
Receivables
|
166 | — | ||||||
|
Deferred exit fees and other
|
100 | 820 | ||||||
|
Total other assets
|
$ | 4,617 | $ | 2,428 | ||||
| Note 9 — | Borrowings under Warehouse Line of Credit |
On October 1, 2007, Care entered into a master repurchase
agreement (“Agreement”) with Column Financial, Inc.
(“Column”), an affiliate of Credit Suisse, one of the
underwriters of Care’s initial public offering in June
2007. This type of lending arrangement is often referred to as a
warehouse facility. The Agreement provided an initial line of
credit of up to $300 million, which could be increased
temporarily to an aggregate amount of $400 million under
the terms of the Agreement.
80
On March 9, 2009, Care repaid this loan in full and closed
the warehouse line of credit.
| Note 10 — | Mortgage Notes Payable |
On June 26, 2008 with the acquisition of the twelve
properties from Bickford Senior Living Group LLC, the Company
entered into a mortgage loan with Red Mortgage Capital, Inc. for
$74.6 million. The terms of the mortgage require
interest-only payments at a fixed interest rate of 6.845% for
the first twelve months. Commencing on the first anniversary and
every month thereafter, the mortgage loan requires a fixed
monthly payment of $0.5 million for both principal and
interest until the maturity in July 2015 when the then
outstanding balance of $69.6 million is due and payable.
Care paid approximately $0.3 million in principal
amortization during the year ended December 31, 2009. The
mortgage loan is collateralized by the properties.
On September 30, 2008 with the acquisition of the two
additional properties from Bickford, the Company entered into an
additional mortgage loan with Red Mortgage Capital, Inc. for
$7.6 million. The terms of the mortgage require interest
and principal payments of approximately $52,000 based on a fixed
interest rate of 7.17% until the maturity in July 2015 when the
then outstanding balance of $7.1 million is due and
payable. Care paid approximately $0.1 in principal amortization
during the year ended December 31, 2009. The mortgage loan
is collateralized by the properties.
As of December 31, 2009, principal repayments due under all
borrowings for the next 5 years and thereafter are as
follows (in millions):
|
2010
|
$ | 0.9 | ||||||
|
2011
|
0.9 | |||||||
|
2012
|
0.9 | |||||||
|
2013
|
1.0 | |||||||
|
2014
|
1.0 | |||||||
|
Thereafter
|
77.3 |
| Note 11 — | Other Liabilities |
Other liabilities as of December 31, 2009 and 2008 consist
principally of deposits and real estate escrows from borrowers
amounting to $1.1 million and $1.3 million,
respectively.
| Note 12 — | Related Party Transactions |
Management
Agreement
In connection with our initial public offering in 2007, we
entered into a Management Agreement with our Manager, which
describes the services to be provided by our Manager and its
compensation for those services. Under the Management Agreement,
our Manager, subject to the oversight of the Board of Directors
of Care, is required to manage the
day-to-day
activities of the Company, for which the Manager receives a base
management fee and is eligible for an incentive fee. The Manager
is also entitled to charge the Company for certain expenses
incurred on behalf of Care.
On September 30, 2008, we amended our Management Agreement
(“Amendment 1”). Pursuant to the terms of the
amendment, the Base Management Fee (as defined in the Management
Agreement) payable to the Manager under the Management Agreement
is reduced to a monthly amount equal to
1
/
12
of 0.875% of the Company’s equity (as defined in the
Management Agreement). In addition, pursuant to the terms of the
Amendment, the Incentive Fee (as defined in the Management
Agreement) to the Manager pursuant to the Management Agreement
has been eliminated and the Termination Fee (as defined in the
Management Agreement) to the Manager upon the termination or
non-renewal of the Management Agreement shall be equal to the
average annual Base Management Fee as earned by the Manager
during the immediately preceding two years multiplied by three,
but in no event shall the Termination Fee be less than
$15.4 million.
In consideration of the Amendment and for the Manager’s
continued and future services to the Company, the Company
granted the Manager warrants to purchase 435,000 shares of
the Company’s common stock at $17.00 per
81
share (the “Warrant”) under the Manager Equity Plan
adopted by the Company on June 21, 2007 (the “Manager
Equity Plan”). The Warrant, which is immediately
exercisable, expires on September 30, 2018.
In accordance with ASC
505-50,
the
Company used the Black-Scholes option pricing model to measure
the fair value of the Warrant granted with the Amendment. The
Black-Scholes model valued the Warrant using the following
assumptions:
|
Volatility
|
47.8% | |||
|
Expected Dividend Yield
|
5.92% | |||
|
Risk-free Rate of Return
|
3.8% | |||
|
Current Market Price
|
$7.79 | |||
|
Strike Price
|
$17.00 | |||
|
Term of Warrant
|
10 years |
The fair value of the Warrant is approximately
$0.5 million, which is recorded as part of additional
paid-in-capital
with a corresponding entry to expense. The Warrant will be
remeasured to fair value at each reporting date, and amortized
into expense over 18 months, which represents the remaining
initial term of the Management Agreement.
On January 15, 2010, the Company entered into an Amended
and Restated Management Agreement, dated as of January 15,
2010 (“Amendment 2”) which amends and restates the
Management Agreement, dated June 27, 2007, as amended by
Amendment No. 1 to the Management Agreement. Amendment 2
became effective upon approval by the Company’s
stockholders of the plan of liquidation on January 28,
2010. Amendment 2 shall continue in effect, unless earlier
terminated in accordance with the terms thereof, until
December 31, 2011.
Amendment 2 reduces the base management fee to a monthly
amount equal to (i) $125,000 from February 1, 2010
until June 30, 2010 and (ii) $100,000 until the
earlier of December 31, 2010 and the sale of certain assets
and (iii) $75,000 until the effective date of expiration or
earlier termination of the agreement, subject to additional
provisions.
Pursuant to the terms of the Amendment 2, the Company shall
pay the Manager a buyout payment of $7.5 million, payable
in three installments of $2.5 million on January 28,
2010 and, effectively, April 1, 2010 and either
June 30, 2011 or the effective date of the termination of
the agreement if earlier. Amendment 2 provides the Company
and the Manager with a right to terminate the agreement without
cause, under certain conditions, and the Company with a right to
terminate the agreement with cause, as defined in
Amendment 1.
Pursuant to the terms of Amendment 2, the Manager is
eligible for an incentive fee of $1.5 million under certain
conditions where cash distributed or distributable to
stockholders equals or exceeds $9.25 per share. See Note 16.
We are also responsible for reimbursing the Manager for its pro
rata portion of certain expenses detailed in the initial
agreement and subsequent amendments, such as rent, utilities,
office furniture, equipment, and overhead, among others,
required for our operations. Transactions with our Manager
during the year ended December 31, 2009 included:
| • | Our $0.5 million liability to our Manager for professional fees paid and other third party costs incurred by our Manager on behalf of Care and management fees. | |
| • | Our expense recognition of $0.5 million and $2.2 million for the three months and year ended December 31, 2009, respectively, for the base management fee. | |
| • | On February 3, 2009, we sold a loan with a book value of $27.0 on the date of sale to our Manager for proceeds of $22.5 resulting in an approximate loss of $4.9 million. | |
| • | On August 19, 2009, we sold two mortgage loans with a book value of approximately $3.7 million to our Manager for proceeds of $2.3 resulting in an approximate loss of $1.4 million. | |
| • | On September 16, 2009, we sold interests in a participation loan in Michigan with book value of approximately $22.2 million on the date of sale to our Manager for proceeds of $17.4 million resulting in an approximate loss of $4.8 million. |
82
| Note 13 — | Fair Value of Financial Instruments |
The Company has established processes for determining fair
values and fair value is based on quoted market prices, where
available. If listed prices or quotes are not available, then
fair value is based upon internally developed models that
primarily use inputs that are market-based or
independently-sourced market parameters.
A financial instrument’s categorization within the
valuation hierarchy is based upon the lowest level of input that
is significant to the fair value measurement. The three levels
of valuation hierarchy are defined as follows:
Level 1 —
inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets
or liabilities in active markets.
Level 2 —
inputs to the valuation
methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument.
Level 3 —
inputs to the valuation
methodology are unobservable and significant to the fair value
measurement.
The following describes the valuation methodologies used for the
Company’s financial instruments measured at fair value, as
well as the general classification of such instruments pursuant
to the valuation hierarchy.
Investment in loans —
the fair value of the
portfolio is based primarily on appraisals from third parties.
Investing in healthcare-related commercial mortgage debt is
transacted through an
over-the-counter
market with minimal pricing transparency. Loans are infrequently
traded and market quotes are not widely available and
disseminated. The Company also gives consideration to its
knowledge of the current marketplace and the credit worthiness
of the borrowers in determining the fair value of the portfolio.
At December 31, 2009, we valued our loans primarily based
upon appraisals obtained from The Debt Exchange, Inc. or DebtX.
When loans are under contract for sale or sold or repaid
subsequent to the filing of our
Form 10-K,
they are valued at their fair value and are valued using
level 2 inputs.
Obligation to issue operating partnership units —
the fair value of our obligation to issue operating
partnership units is based on an internally developed valuation
model, as quoted market prices are not available nor are quoted
prices for similar liabilities. Our model involves the use of
management estimates as well as some Level 2 inputs. The
variables in the model include the estimated release dates of
the shares out of escrow, based on the expected performance of
the underlying properties, a discount factor of approximately
15%, and the market price and expected quarterly dividend of
Care’s common shares at each measurement date.
The following table presents the Company’s financial
instruments carried at fair value on the consolidated balance
sheet as of December 31, 2009:
| Fair Value at December 31, 2009 | ||||||||||||||||
|
($ in millions)
|
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
Assets
|
||||||||||||||||
|
Investment in loans
|
$ | — | $ | 16.1 | $ | 9.2 | $ | 25.3 | ||||||||
|
Liabilities
|
||||||||||||||||
|
Obligation to issue operating partnership
units
(1)
|
$ | — | $ | — | $ | 2.9 | $ | 2.9 | ||||||||
| Fair Value at December 31, 2008 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
Investment in loans
|
$ | 22.5 | $ | — | $ | 137.4 | $ | 159.9 | ||||||||
|
Liabilities
|
||||||||||||||||
|
Obligation to issue operating partnership
units
(1)
|
$ | — | $ | — | $ | 3.0 | $ | 3.0 | ||||||||
| (1) | At December 31, 2008, the fair value of our obligation to issue partnership units was $3.0 million and we recorded unrealized gain of $0.1 million on revaluation at December 31, 2009 and an unrealized loss of $0.2 million on revaluation at December 31, 2008. |
83
The tables below present reconciliations for all assets and
liabilities measured at fair value on a recurring basis using
significant Level 2 and Level 3 inputs during 2009.
Level 3 instruments presented in the tables include a
liability to issue partnership units, which are carried at fair
value. The Level 2 and Level 3 instruments were valued
based upon appraisals, actual cash repayments and sales
contracts or using models that, in management’s judgment,
reflect the assumptions a marketplace participant would use at
December 31, 2009.
|
Level 3 Instruments — Fair
|
||||||||
| Value Measurements | ||||||||
|
Obligation to
|
Investment
|
|||||||
|
issue
|
in loans held
|
|||||||
|
Partnership
|
at lower of cost
|
|||||||
| ($ in millions) | Units | or market | ||||||
|
Balance, December 31, 2008
|
$ | (3.0 | ) | $ | 159.9 | |||
|
Sales of loans to Manager
|
— | (42.3 | ) | |||||
|
Sales of loans to third parties
|
— | (55.8 | ) | |||||
|
Loan prepayments and principal repayments
|
— | (40.5 | ) | |||||
|
Total unrealized gains included in income statement
|
0.1 | 4.0 | ||||||
|
Transfers to Level 2
|
— | (16.1 | ) | |||||
|
Balance, December 31, 2009
|
$ | (2.9 | ) | $ | 9.2 | |||
|
Net change in unrealized losses from obligations
owed/investments still held at December 31, 2009
|
$ | 0.1 | $ | 4.0 | ||||
In addition we are required to disclose fair value information
about financial instruments, whether or not recognized in the
financial statements, for which it is practical to estimate that
value. In cases where quoted market prices are not available,
fair value is based upon the application of discount rates to
estimated future cash flows based on market yields or other
appropriate valuation methodologies. Considerable judgment is
necessary to interpret market data and develop estimated fair
value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts we could realize on
disposition of the financial instruments. The use of different
market assumptions
and/or
estimation methodologies may have a material effect on the
estimated fair value amounts.
In addition to the amounts reflected in the financial statements
at fair value as noted above, cash equivalents, accrued interest
receivables, and accounts payable and accrued expenses
reasonably approximate their fair values due to the short
maturities of these items. Management believes that the mortgage
notes payable of $74.6 million and $7.6 million that
were incurred from the acquisitions of the Bickford properties
on June 26, 2008 and September 30, 2008, respectively,
have a fair value of approximately $85.1 million as of
December 31, 2009. The fair value of the debt has been
determined by evaluating the present value of the agreed upon
cash flows at a discount rate reflective of financing terms
currently available to us for collateral with the same credit
and quality characteristics.
The Company is exposed to certain risks relating to its ongoing
business. The primary risk managed by using derivative
instruments is interest rate risk. Interest rate caps are
entered into to manage interest rate risk associated with the
Company’s borrowings. The company has no interest rate caps
as of December 31, 2009.
We are required to recognize all derivative instruments as
either assets or liabilities at fair value in the statement of
financial position. The Company has not designated any of its
derivatives as hedging instruments. The
84
Company’s financial statements included the following fair
value amounts and gains and losses on derivative instruments
(dollars in thousands):
|
December 31,
|
December 31,
|
|||||||||||
| 2009 | 2008 | |||||||||||
|
Balance
|
Balance
|
Balance
|
||||||||||
|
Derivatives not designated as
|
Sheet
|
Fair
|
Sheet
|
Fair
|
||||||||
|
hedging instruments
|
Location | Value | Location | Value | ||||||||
|
Operating Partnership Units
|
Obligation to issue operating partnership units | $ | (2,890 | ) | Obligation to issue operating partnership units | $ | (3,045 | ) | ||||
| Other assets | 7 | |||||||||||
|
Total Derivatives
|
$ | (2,890 | ) | $ | (3,038 | ) | ||||||
|
Amount of (Gain)/Loss
|
||||||||||
|
Recognized in Income on
|
||||||||||
|
Derivative
|
||||||||||
|
Location of (Gain)/Loss
|
Year Ended | |||||||||
|
Derivatives not designated as
|
Recognized in Income on
|
December 31,
|
December 31,
|
|||||||
|
hedging instruments
|
Derivative | 2009 | 2008 | |||||||
|
Operating Partnership Units
|
Unrealized(gain)/loss on derivative instruments | $ | (155 | ) | $ | 195 | ||||
|
Interest Rate Caps
|
Unrealized(gain)/loss on derivative instruments | 2 | 42 | |||||||
| Total | $ | (153 | ) | $ | 237 | |||||
| Note 14 — | Stockholders’ Equity |
Our authorized capital stock consists of 100,000,000 shares
of preferred stock, $0.001 par value and
250,000,000 shares of common stock, $0.001 par value.
As of December 31, 2009 and 2008, no shares of preferred
stock were issued and outstanding and 21,159,647 and
21,021,359 shares of our common stock were issued
respectively and 20,158,894 and 20,021,359 shares of common
stock were outstanding, respectively.
Equity
Plan
Restricted
Stock Grants:
At the time of our initial public offering in June 2007, we
issued 133,333 shares of common stock to our Manager’s
employees, some of whom are officers or directors of Care and we
also awarded 15,000 shares of common stock to Care’s
independent board members. The shares granted to our
Manager’s employees had an initial vesting date of
June 22, 2010, three years from the date of grant. The
shares granted to our independent board members vest ratably on
the first, second and third anniversaries of the grant. During
the year ended December 31, 2008, 42,000 shares of
restricted stock granted to our Manager’s employees were
forfeited and 10,000 shares vested due to a termination of
an officer of the Manager without cause. In addition,
20,000 shares of restricted stock were granted to a board
member who formerly served as an employee of our Manager. These
shares had a fair value of $183,000 at issuance and had an
initial vesting date of June 27, 2010.
On January 28, 2010, our shareholders approved the
Company’s plan of liquidation. Under the terms of each of
these awards, the approval of the plan of liquidation by our
shareholders accelerated the vesting of the awards on that day.
85
Schedule
of Non Vested Shares — Equity Plan
|
Grants to
|
Grants to
|
|||||||||||
|
Independent
|
Manager’s
|
Total
|
||||||||||
| Directors | Employees | Grants | ||||||||||
|
Balance at January 1, 2008
|
15,000 | 133,333 | 148,333 | |||||||||
|
Granted
|
20,000 | — | 20,000 | |||||||||
|
Vested
|
5,000 | 10,000 | 15,000 | |||||||||
|
Forfeited
|
— | 42,000 | 42,000 | |||||||||
|
Balance at December 31, 2008
|
30,000 | 81,333 | 111,333 | |||||||||
|
Granted
|
— | — | — | |||||||||
|
Vested
|
30,000 | 81,333 | 111,333 | |||||||||
|
Forfeited
|
— | — | — | |||||||||
|
Balance at December 31, 2009
|
— | — | — | |||||||||
Restricted Stock Units:
On April 8, 2008, the Compensation Committee (the
“Committee”) of the Board of Directors of Care awarded
the Company’s CEO, 35,000 shares of restricted stock
units (“RSUs”) under the Care Investment
Trust Inc. Equity Incentive Plan (“Equity Plan”).
The RSUs had a fair value of $385,000 on the grant date. The
initial vesting of the award was 50% on the third anniversary of
the award and the remaining 50% on the fourth anniversary of the
award. Under the terms of these awards, shareholder approval of
the plan of liquidation accelerated the vesting of the awards on
that day.
On November 5, 2009, the Board of Directors of Care
Investment Trust Inc. (the “Company”) awarded our
Chairman of the Board of Directors 10,000 restricted stock
units, which were initially subject to vesting in four equal
installments, commencing on November 5, 2010. Under the
terms of this award, shareholder approval of the plan of
liquidation accelerated the vesting of this award on that day.
Long-Term
Equity Incentive Programs:
On May 12, 2008, the Committee approved two new long-term
equity incentive programs under the Equity Plan. The first
program is an annual performance-based RSU award program (the
“RSU Award Program”). All RSUs granted under the RSU
Award Program included a vesting period of four years. The
second program is a three-year performance share plan (the
“Performance Share Plan”).
In connection with the initial adoption of the RSU Award
Program, certain employees of the Manager and its affiliates
were granted 68,308 RSUs on the adoption date with a grant date
fair value of $0.7 million. 9,242 of these shares were
forfeited in 2009. 14,763 of these shares vested in May 2009.
Achievement of awards under the 2008 RSU Award Program was based
upon the Company’s ability to meet both financial (AFFO per
share) and strategic (shifting from a mortgage to an equity
REIT) performance goals during 2008, as well as on the
individual employee’s ability to meet performance goals. In
accordance with the 2008 RSU Award Program 49,961 RSUs and
30,333 RSUs were granted on March 12, 2009 and May 7,
2009, respectively. RSUs granted in connection with the 2008 RSU
Award Program were initially subject to the following vesting
schedule:
|
2010
|
34,840 | |||
|
2011
|
52,340 | |||
|
2012
|
52,343 | |||
|
2013
|
20,074 |
Under the terms of each of these awards, shareholder approval of
the plan of liquidation accelerated the vesting of the awards on
that day.
Under the Performance Share Plan, a participant is granted a
number of performance shares or units, the settlement of which
will depend on the Company’s achievement of certain
pre-determined financial goals at the end
86
of the three-year performance period. Any shares received in
settlement of the performance award will be issued to the
participant in early 2011, without any further vesting
requirements. With respect to the
2008-2010
performance periods, the performance goals relate to the
Company’s ability to meet both financial (compound growth
in AFFO per share) and share return goals (total shareholder
return versus the Company’s healthcare equity and mortgage
REIT peers). The Committee has established threshold, target and
maximum levels of performance. If the Company meets the
threshold level of performance, a participant will earn 50% of
the performance share grant if it meets the target level of
performance, a participant will earn 100% of the performance
share grant and if it achieves the maximum level of performance,
a participant will earn 200% of the performance share grant. As
of December 31, 2009, no shares have been earned under this
plan.
On December 10, 2009, the Company granted performance share
awards to plan participants for an aggregate amount of
15,000 shares at target levels and an aggregate maximum of
30,000 shares. On February 23, 2009, the terms of the
awards were modified such that the awards are now triggered upon
the execution, during 2010, of one or more of the following
transactions that results in a return of liquidity to the
Company’s stockholders within the parameters expressed in
the agreement: (i) a merger or other business combination
resulting in the disposition of all of the issued and
outstanding equity securities of the Company, (ii) a tender
offer made directly to the Company’s stockholders either by
the Company or a third party for at least a majority of the
Company’s issued and outstanding common stock, or
(iii) the declaration of aggregate distributions by the
Company’s Board equal to or exceeding $8.00 per share.
As of December 31, 2009, 210,677 shares of our common
stock and 197,615 RSUs had been granted pursuant to the Equity
Plan and 267,516 shares remain available for future
issuances. The Equity Plan will automatically expire on the
10th anniversary of the date it was adopted. Care’s
Board of Directors may terminate, amend, modify or suspend the
Equity Plan at any time, subject to stockholder approval in the
case of amendments or modifications. We recorded
$2.3 million of expense related to compensation and
$1.2 million of expense related to remeasurement of grants
to fair value for the years ended December 31, 2009 and
2008, respectively, Approximately $0.8 million of the
expense recorded in 2009 related to accelerated vesting in the
aggregate. All of the shares issued under our Equity Plan are
considered non-employee awards. Accordingly, the expense for
each period is determined based on the fair value of each share
or unit awarded over the required performance period.
Shares Issued
to Directors for Board Fees:
On January 5, 2009, April 3, 2009, July 1, 2009,
October 1, 2009, and January 4, 2010, respectively,
9,624, 13,734, 14,418, 9,774 and 8,030 shares of common
stock with an aggregate fair value of approximately $300,000
were granted to our independent directors as part of their
annual retainer. Each independent director receives an annual
base retainer of $100,000, payable quarterly in arrears, of
which 50% is paid in cash and 50% in common stock of Care.
Shares granted as part of the annual retainer vest immediately
and are included in general and administrative expense.
Manager
Equity Plan
Upon completion of our initial public offering in June 2007,
approximately $1.3 million shares were made available and
we granted 607,690 fully vested shares of our common stock to
our Manager under the Manager Equity Plan. These shares are
subject to our Manager’s right to register the resale of
such shares pursuant to a registration rights agreement we
entered into with our Manager in connection with our initial
public offering. At December 31, 2009, 282,945 shares
are available for future issuances under the Manager Equity
Plan. The Manager Equity Plan will automatically expire on the
10th anniversary of the date it was adopted. Care’s
Board of Directors may terminate, amend, modify or suspend the
Manager Equity Plan at any time, subject to stockholder approval
in the case of amendments or modifications.
The 282,945 shares available for future issuance under the
Manager Equity Plan are net of 435,000 shares that may be
issued upon conversion of a warrant issued to our Manager
described in Note 12.
87
| Note 15 — | Loss per share ($ in thousands, except share and per share data) |
|
For the Period from
|
||||||||||||
|
June 22, 2007
|
||||||||||||
|
For the Year
|
For the Year
|
(Commencement of
|
||||||||||
|
Ended
|
Ended
|
Operations) to
|
||||||||||
| December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||
|
Loss per share
—
basic and diluted
|
$ | (0.14 | ) | $ | (1.47 | ) | $ | (0.07 | ) | |||
|
Numerator
|
||||||||||||
|
Net loss
|
$ | (2,826 | ) | $ | (30,806 | ) | $ | (1,557 | ) | |||
|
Denominator
|
||||||||||||
|
Weighted Average Common Shares Outstanding
|
20,061,763 | 20,952,972 | 20,866,526 | |||||||||
Diluted loss per share was the same as basic loss per share for
each period because all outstanding restricted stock awards were
anti-dilutive.
| Note 16 — | Commitments and Contingencies |
At December 31, 2009, Care was obligated to provide
approximately $1.9 million in tenant improvements related
to our purchase of the Cambridge properties in 2010. Care is
also obligated to fund additional payments for expansion of four
of the facilities acquired in the Bickford transaction on
June 26, 2008. The maximum amount that the Company is
obligated to fund is $7.2 million. Since these payments
would increase our investment in the properties, the minimum
base rent and additional base rent would increase based on the
amounts funded. After funding the expansion payments and meeting
certain conditions as outlined in the documents associated with
the transaction, the sellers are entitled to the balance of the
commitment of $7.2 million less the total of all expansion
payments made in conjunction with the properties. As of
December 31, 2009, no expansion payments have been
requested and Bickford has yet to meet any of a series of
conditions which would need to be satisfied by July 26,
2010 in accordance with the terms of the agreement.
Under our Management Agreement, our Manager, subject to the
oversight of the Company’s board of directors, is required
to manage the
day-to-day
activities of Care, for which the Manager receives a base
management fee. The Management Agreement was amended on
January 15, 2010, effective on January 28, 2010 (see
Note 12).
Under the amended terms, the agreement expires on
December 31, 2011. The base management fee is payable
monthly in arrears in an amount equal to 1/12 of 0.875% of the
Company’s stockholders’ GAAP equity for January 2010
and $125,000 per month thereafter, subject to reduction to
$100,000 per month under certain conditions.
In addition, under the amended terms the Company is obligated to
make buyout payments, which replaced a termination fee
contingency. The buyout payments were paid or payable as
follows: (i) $2.5 million paid on January 29,
2010, (ii) $2.5 million upon the earlier of
(a) April 1, 2010 and (b) the effective date of
the termination of the Agreement by either of the Company or the
Manager; and (iii) $2.5 million upon the earlier of
(a) June 30, 2011 and (b) the effective date of
the termination of the Agreement by either the Company or the
Manager.
The table below summarizes our contractual obligations as of
December 31, 2009.
| Amounts in millions | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | ||||||||||||||||||
|
Commitment to fund tenant improvements
|
$ | 1.9 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
Commitment to fund earn out
|
7.2 | — | — | — | — | — | ||||||||||||||||||
|
Mortgage notes payable
|
6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 80.4 | ||||||||||||||||||
|
Management fee
|
1.5 | 1.5 | — | — | — | — | ||||||||||||||||||
|
Buyout fee to Manager
|
5.0 | 2.5 | — | — | — | — | ||||||||||||||||||
Care has commitments at December 31, 2009 to finance tenant
improvements of $1.9 million and earn out of
$7.2 million under certain conditions. The commitment
amount for the earn out is contingent upon meeting certain
conditions. If those conditions are not met, our obligation to
fund those commitments would be zero. $1.7 million of
88
tenant improvement represents hold back from the initial
purchase of Cambridge. No provision for the earn out contingency
has been accrued at December 31, 2009. The estimated
amounts and timing of the commitments to fund tenant
improvements are based on projections by the managers who are
affiliates of Cambridge and Bickford.
Pursuant to terms of Amendment 2 to the Management
Agreement, the Manager is eligible for an incentive fee of
$1.5 million under certain conditions where distributable
cash to stockholders equals or exceeds $9.25 per share. No
provision has been made for the incentive fee.
On September 18, 2007, a class action complaint for
violations of federal securities laws was filed in the United
States District Court, Southern District of New York alleging
that the Registration Statement relating to the initial public
offering of shares of our common stock, filed on June 21,
2007, failed to disclose that certain of the assets in the
contributed portfolio were materially impaired and overvalued
and that we were experiencing increasing difficulty in securing
our warehouse financing lines. On January 18, 2008, the
court entered an order appointing co-lead plaintiffs and co-lead
counsel. On February 19, 2008, the co-lead plaintiffs filed
an amended complaint citing additional evidentiary support for
the allegations in the complaint. We believe the complaint and
allegations are without merit and intend to defend against the
complaint and allegations vigorously. We filed a motion to
dismiss the complaint on April 22, 2008. The plaintiffs
filed an opposition to our motion to dismiss on July 9,
2008, to which we filed our reply on September 10, 2008. On
March 4, 2009, the court denied our motion to dismiss. We
filed our answer on April 15, 2009. At a conference held on
May 15, 2009, the Court ordered the parties to make a joint
submission (the “Joint Statement”) setting forth:
(i) the specific statements that the plaintiffs’ claim
are false and misleading; (ii) the facts on which the
plaintiffs rely as showing each alleged misstatement was false
and misleading; and (iii) the facts on which the defendants
rely as showing those statements were true. The parties filed
the Joint Statement on June 3, 2009. On July 31, 2009,
the parties entered into a stipulation that narrowed the scope
of the proceeding to the single issue of the warehouse financing
disclosure in the Registration Statement.
On December 7, 2009, the Court ordered the parties to file
an abbreviated joint pre-trial statement on April 7, 2010.
The Court scheduled a pre-trial conference for April 9,
2010, at which the Court will determine based on the joint
pre-trial statement whether to permit us and the other
defendants to file a summary judgment motion. The outcome of
this matter cannot currently be predicted. To date, Care has
incurred approximately $1.0 million to defend against this
complaint and any incremental costs to defend will be paid by
Care’s insurer. No provision for loss related to this
matter has been accrued at December 31, 2009.
On November 25, 2009, we filed a lawsuit in the
U.S. District Court for the Northern District of Texas
against Mr. Jean-Claude Saada and 13 of his companies (the
“Saada Parties”), seeking declaratory judgments
construing certain contracts among the parties and also seeking
tort damages against the Saada Parties for tortious interference
with prospective contractual relations and breach of the duty of
good faith and fair dealing. On January 27, 2010, the Saada
Parties answered our complaint, and simultaneously filed
counterclaims and a third-party complaint (the
“Counterclaims”) that named our subsidiaries ERC Sub
LLC and ERC Sub, L.P., external manager CIT Healthcare LLC, and
Board Chairman Flint D. Besecker, as additional third-party
defendants. The Counterclaims seek four declaratory judgments
construing certain contracts among the parties that are
basically the mirror image of our declaratory judgment claims.
In addition, the Counterclaims also seek monetary damages for
purported breaches of fiduciary duty and the duty of good faith
and fair dealing, as well as fraudulent inducement, against us
and the third-party defendants jointly and severally. The
Counterclaims further request indemnification by ERC Sub, L.P.,
pursuant to a contract between the parties, and the imposition
of a “constructive trust” on the proceeds of any
future liquidation of Care, to ensure a reservoir of funds from
which any liability to the Saada Parties could be paid. Although
the Counterclaims do not itemize their asserted damages, they
assign these damages a value of $100 million “or
more.” In response to the Counterclaims, Care and the
third-party defendants filed on March 5, 2010, an omnibus
motion to dismiss all of the Counterclaims. The outcome of this
matter cannot currently be predicted. To date, Care has incurred
approximately $0.2 million to defend against this
complaint. No provision for loss related to this matter has been
accrued at December 31, 2009.
Care is not presently involved in any other material litigation
nor, to our knowledge, is any material litigation threatened
against us or our investments, other than routine litigation
arising in the ordinary course of business. Management believes
the costs, if any, incurred by us related to litigation will not
materially affect our financial position, operating results or
liquidity.
89
Care is negotiating for the sale of the Company with a third
party and has presented going concern financial statements based
on its expectation that a sale of the company is likely to
occur. See Notes 2 and 19.
On January 28, 2010, shareholders approved the
Company’s plan of liquidation. See the Company’s
definitive proxy statement filed with the Securities and
Exchange Commission on December 28, 2010 containing the
plan of liquidation. See Note 19.
| Note 17 — | Financial Instruments: Derivatives and Hedging |
The fair value of our obligation to issue operating partnership
units was $2.9 million and $3.0 million at
December 31, 2009, December 31 and 2008, respectively.
On February 1, 2008, we entered into three interest rate
caps on three loans pledged as collateral under our warehouse
line of credit in order to increase the advance rates available
on the pledged loans. These caps were terminated on
April 20, 2009 for an amount equal to the remaining book
value.
| Note 18 — | Quarterly Financial Information (Unaudited) |
Summarized unaudited consolidated quarterly information for each
of the years ended December 31, 2009 and 2008 is provided
below.
| (Amounts in millions except per share amounts) | Quarter Ended | |||||||||||||||
| 2009: | March 31 (1) | June 30 (1) | Sept. 30 (1) | Dec. 31 (1) | ||||||||||||
|
Revenues
|
$ | 6.1 | $ | 5.1 | $ | 5.0 | $ | 3.9 | ||||||||
|
Income (loss) available to common shareholders
|
2.5 | (0.5 | ) | (0.4 | ) | (4.4 | ) | |||||||||
|
Earnings per share — basic and diluted
|
$ | 0.12 | $ | (0.03 | ) | $ | (0.02 | ) | $ | (0.21 | ) | |||||
|
Earnings per share — diluted
|
— | — | — | — | ||||||||||||
| (Amounts in millions except per share amounts) | Quarter Ended | |||||||||||||||
| 2008: | March 31 | June 30 | Sept. 30 (1) | Dec. 31 (1) | ||||||||||||
|
Revenues
|
$ | 4.7 | $ | 3.6 | $ | 6.6 | $ | 7.4 | ||||||||
|
Income (loss) available to common shareholders
|
0.5 | 0.7 | (3.5 | ) | (28.5 | ) | ||||||||||
|
Earnings per share — basic and diluted
|
$ | 0.02 | $ | 0.03 | $ | (0.17 | ) | $ | (1.35 | ) | ||||||
|
Earnings per share — diluted
|
$ | 0.02 | $ | 0.03 | — | — | ||||||||||
| (1) | — Basic and diluted are the same as inclusion of diluted shares would be “anti-dilutive” |
| Note 19 — | Subsequent Events |
Repayment
and Sale of Loans held at LOCOM
On February 19, 2010, one borrower repaid one of the
Company’s mortgage loans with a net carrying value of
approximately $10.0 million as of December 31, 2008
and a September 30, 2009 interim carrying value of
approximately $10.0 million as of December 31, 2009.
Proceeds from the repayment of this mortgage loan were
approximately $10.0 million.
On March 2, 2010, we sold one mortgage loan to a third
party with a net carrying value of approximately
$7.8 million as of December 31, 2008 and a
September 30, 2009 interim carrying value of approximately
$6.1 million before selling costs as of December 31,
2009. Net realized proceeds from the sale of this mortgage loan
after selling costs of approximately $0.2 million were
approximately $5.9 million.
Amendment
to Management Agreement with Manager
See Note 12 for a discussion of a January 15 amendment to
the Company’s Management Agreement with its Manager.
90
Approval
of Plan of Liquidation
On December 10, 2009, our Board of Directors approved a
plan of liquidation and recommended that our shareholders
approve the plan of liquidation. On January 28, 2010, our
shareholders approved the plan of liquidation. We have entered
into a material definitive agreement for a sale of control of
the Company as described below and have not pursued the plan of
liquidation.
Sale
of Control of the Company
On March 16, 2010, we executed a definitive agreement with
Tiptree Financial Partners, L.P. (“Tiptree” or the
“Buyer”) for the sale of control of the Company in a
series of contemplated transactions. Under the agreement, the
parties have agreed to a sale of a quantity of shares to the
Buyer to occur immediately following the completion of a cash
tender offer by us for Care’s outstanding common shares.
The quantity of shares to be sold to the Buyer will be that
quantity which would represent at least 53.4% of the shares of
the Company’s common stock on a fully diluted basis after
completion of the Company’s cash tender offer. The
agreement is subject to customary closing conditions and our
ability to proceed with the cash tender offer.
In connection with the sale transaction contemplated by the
agreement, we intend to make a cash tender offer for up to 100%
of the outstanding common shares of Care stock at an offer price
of $9.00 per share, subject to a minimum subscription of
10,300,000 shares of Care stock. Also, in connection with
the transaction, the Company intends to terminate its existing
management agreement with our Manager and it is anticipated that
the resulting company will be advised by an affiliate of Tiptree.
We intend to seek shareholder approval to abandon the plan of
liquidation and pursue the contemplated transactions described
above. If the contemplated transactions are not completed, we
may pursue the plan of liquidation as approved by the
stockholders on January 28 or we may consider other strategic
alternatives to liquidation. In the event that a liquidation of
the Company is pursued, material adjustments to these going
concern financial statements may need to be recorded to present
liquidation basis financial statements. Material adjustments
which may be required for liquidation basis accounting primarily
relate to reflecting assets and liabilities at their net
realizable value and costs to be incurred to carry out the plan
of liquidation. After such adjustments, the likely range of
equity value which would be presented in liquidation basis
financial statements would be between $8.05 and 8.90 per share.
91
| ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| ITEM 9A. | Controls and Procedures |
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SEC’s
rules and forms, and that such information is accumulated and
communicated to our management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosures. Notwithstanding
the foregoing, no matter how well a control system is designed
and operated, it can provide only reasonable, not absolute,
assurance that it will detect or uncover failures within our
company to disclose material information otherwise required to
be set forth in our periodic reports.
As of the end of the period covered by this report, we conducted
an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and our
Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based upon
that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this
report.
Changes
in Internal Controls over Financial Reporting
There has been no change in our internal control over financial
reporting during the three months ended December 31, 2009,
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Management’s
Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting for the
Company. The Company’s internal control over financial
reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
consolidated financial statements for external purposes in
accordance with generally accepted accounting principles. The
Company’s internal control over financial reporting
includes those policies and procedures that:
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company,
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of consolidated
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
management and directors of the Company, and
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of the Company’s assets that could have a material effect
on the consolidated financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of the effectiveness to
future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies and procedures included in such
controls may deteriorate.
The Company conducted an evaluation of the effectiveness of our
internal control over financial reporting based upon the
framework in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based upon such
evaluation, our management concluded that our internal control
over financial reporting was effective as of December 31,
2009.
The Company’s effectiveness of our internal control over
financial reporting, as of December 31, 2009, has been
audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their
attestation report which is included immediately below.
92
| ITEM 9B. | Other Information |
A Special Meeting of Stockholders (the “Special
Meeting”) was announced on December 29, 2009 and held
on January 28, 2010.
Proxies for the Annual Meeting were solicited pursuant to
Regulation 14A under the Exchange Act. At the Special
Meeting, stockholders voted on a proposal for approval of the
Company’s plan of liquidation and a proposal to approve any
adjournment of the special meeting, including, if necessary, to
solicit additional proxies in favor of the plan of liquidation
proposal if sufficient votes to approve such plan of liquidation
proposal were not available. The number of votes cast for and
against these proposals and the number of abstentions and broker
non-votes are set forth below:
| Item | For | Against | Abstain | |||||||||
|
Proposal 1: Plan of Liquidation
|
11,858,977 | 18,634 | 760 | |||||||||
|
Proposal 2: Adjournment of Special Meeting
|
11,574,640 | 301,884 | 1,847 | |||||||||
| ITEM 10. | Directors, Executive Officers and Corporate Governance of the Registrant |
The information called for by ITEM 10 is incorporated by
reference to the information under the caption “Election of
Directors” in the Registrant’s definitive proxy
statement relating to its Annual Meeting of Stockholders.
| ITEM 11. | Executive Compensation |
The information required by ITEM 11 is incorporated by
reference to the information under the caption “Executive
Compensation” in the Registrant’s definitive proxy
statement relating to its Annual Meeting of Stockholders.
| ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by ITEM 12 is incorporated by
reference to the information under the caption “Security
Ownership of Certain Beneficial Owners and Management” in
the Registrant’s definitive proxy statement relating to its
Annual Meeting of Stockholders.
| ITEM 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by ITEM 13 is incorporated by
reference to the information under the captions “Certain
Relationships and Related Transactions” and “Director
Independence” in the Registrant’s definitive proxy
statement relating to its Annual Meeting of Stockholders.
| ITEM 14. | Principal Accountant Fees and Services |
The information required by ITEM 14 is incorporated by
reference to the information under the caption
“Ratification of Selection of Independent Registered Public
Accounting Firm” in the Registrant’s definitive proxy
statement relating to its Annual Meeting of Stockholders.
93
| ITEM 15. | Exhibits, Financial Statement Schedules |
(a) and (c) Financial Statements and
Schedules – See Index to Financial Statements and
Schedules included in ITEM 8.
(b) Exhibits
| Exhibit No. | Description | |||
| 3 | .1 | Amended and Restated Articles of Incorporation of the Registrant (previously filed as Exhibit 3.1 to the Company’s Form 10-Q (File No. 001-33549), filed on August 14, 2007 and herein incorporated by reference. | ||
| 3 | .2 | Amended and Restated Bylaws of the Registrant (previously filed as Exhibit 3.2 to the Company’s Form 10-Q (File No. 001-33549), filed on August 14, 2007 and herein incorporated by reference). | ||
| 4 | .1 | Form of Certificate for Common Stock (previously filed as Exhibit 4.1 to the Company’s Form S-11, as amended (File No. 333-141634), and herein incorporated by reference). | ||
| 10 | .1 | Assignment Agreement, dated as of January 31, 2009 (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on February 5, 2009 and herein incorporated by reference). | ||
| 10 | .2 | Amendment No. 4 to Master Repurchase Agreement, dated as of November 13, 2008 (previously filed as Exhibit 10.5 to the Company’s Form 10-Q (File No. 001-33549), filed on November 14, 2008 and herein incorporated by reference). | ||
| 10 | .3 | Amendment to Management Agreement, dated as of September 30, 2008 (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on October 2, 2008 and herein incorporated by reference). | ||
| 10 | .4 | Warrant to Purchase Common Stock, dated as of September 30, 2008 (previously filed as Exhibit 10.2 to the Company’s Form 8-K (File No. 001-33549), filed on October 2, 2008 and herein incorporated by reference). | ||
| 10 | .5 | Mortgage Purchase Agreement, dated as of September 30, 2008 (previously filed as Exhibit 10.3 to the Company’s Form 8-K (File No. 001-33549), filed on October 2, 2008 and herein incorporated by reference). | ||
| 10 | .6 | Earn Out Agreement, dated as of June 26, 2008 (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on July 2, 2008 and herein incorporated by reference). | ||
| 10 | .7 | Multifamily Note, dated as of June 26, 2008 (previously filed as Exhibit 10.2 to the Company’s Form 8-K (File No. 001-33549), filed on July 2, 2008 and herein incorporated by reference). | ||
| 10 | .8 | Exceptions to Non-Recourse Guaranty, dated as of June 26, 2008 (previously filed as Exhibit 10.3 to the Company’s Form 8-K (File No. 001-33549), filed on July 2, 2008 and herein incorporated by reference). | ||
| 10 | .9 | Master Lease Agreement, dated as of June 26, 2008 (previously filed as Exhibit 10.4 to the Company’s Form 8-K (File No. 001-33549), filed on July 2, 2008 and herein incorporated by reference). | ||
| 10 | .10 | Amendment No. 3 to Master Repurchase Agreement, dated as of June 26, 2008 (previously filed as Exhibit 10.5 to the Company’s Form 8-K (File No. 001-33549), filed on July 2, 2008 and herein incorporated by reference). | ||
| 10 | .11 | Purchase and Sale Contract, dated as of May 14, 2008 (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on May 20, 2008 and herein incorporated by reference). | ||
| 10 | .12 | Performance Share Award Agreement, dated as of May 12, 2008 (previously filed as Exhibit 10.4 to the Company’s Form 10-Q (File No. 001-33549), filed on November 14, 2008 and herein incorporated by reference). | ||
| 10 | .13 | Restricted Stock Unit Agreement Under the 2007 Care Investment Trust Inc. Equity Plan, dated as of April 8, 2008 (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on April 14, 2008 and herein incorporated by reference). | ||
94
| Exhibit No. | Description | |||
| 10 | .14 | Form of Restricted Stock Unit Agreement Under the 2007 Care Investment Trust Inc. Equity Plan (previously filed as Exhibit 10.2 to the Company’s Form 8-K (File No. 001-33549), filed on April 14, 2008 and herein incorporated by reference). | ||
| 10 | .15 | Contribution and Purchase Agreement, dated as of December 31, 2007 (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on January 4, 2008 and herein incorporated by reference). | ||
| 10 | .16 | Master Repurchase Agreement entered into by Care Investment Trust Inc. and two of its subsidiaries, Care QRS 2007 RE Holdings Corp. and Care Mezz QRS 2007 RE Holdings Corp., with Column Financial, Inc. (previously filed as Exhibit 10.1 to the Company’s Form 10-Q (File No. 001-33549), filed on November 14, 2007 and herein incorporated by reference). | ||
| 10 | .17 | Registration Rights Agreement (previously filed as Exhibit 10.1 to the Company’s Form 10-Q (File No. 001-33549), filed on August 14, 2007 and herein incorporated by reference). | ||
| 10 | .18 | Management Agreement (previously filed as Exhibit 10.2 to the Company’s Form 10-Q (File No. 001-33549), filed on August 14, 2007 and herein incorporated by reference). | ||
| 10 | .19 | Care Investment Trust Inc. Equity Plan (previously filed as Exhibit 10.4 to the Company’s Form 10-Q (File No. 001-33549), filed on August 14, 2007 and herein incorporated by reference). | ||
| 10 | .20 | Manager Equity Plan (previously filed as Exhibit 10.5 to the Company’s Form 10-Q (File No. 001-33549), filed on August 14, 2007 and herein incorporated by reference). | ||
| 10 | .21 | Form of Restricted Stock Agreement under Care Investment Trust Inc. Equity Plan (previously filed as Exhibit 10.5 to the Company’s Form S-11, as amended (File No. 333-141634), and herein incorporated by reference). | ||
| 10 | .22 | Form of Restricted Stock Agreement under Care Investment Trust Inc. Equity Plan (previously filed as Exhibit 10.6 to the Company’s Form S-11, as amended (File No. 333-141634), and herein incorporated by reference). | ||
| 10 | .23 | Form of Restricted Stock Agreement under Care Investment Trust Inc. Manager Equity Plan (previously filed as Exhibit 10.8 to the Company’s Form S-11, as amended (File No. 333-141634), and herein incorporated by reference). | ||
| 10 | .24 | Form of Indemnification Agreement entered into by the Registrant’s directors and officers (previously filed as Exhibit 10.9 to the Company’s Form S-11, as amended (File No. 333-141634), and herein incorporated by reference). | ||
| 10 | .25 | Assignment Agreement dated as of January 31, 2009, by and between Care Investment Trust Inc. and CIT Healthcare LLC (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on February 5, 2009 and herein incorporated by reference). | ||
| 10 | .26 | Loan Purchase Agreement with CapitalSource Bank dated September 15, 2009 (previously filed as Exhibit 10.1 to the Company’s Form 10-Q (File No. 001-33549), filed on November 9, 2009 and herein incorporated by reference). | ||
| 10 | .27 | Loan Purchase and Sale Agreement dated as of October 6, 2009, by and between Care Investment Trust Inc. and General Electric Capital Corporation (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on November 18, 2009 and herein incorporated by reference). | ||
| 10 | .28 | Care Investment Trust Inc. Plan of Liquidation (previously filed as Exhibit A to the Company’s Schedule 14A (File No. 001-33549), filed on December 28, 2009 and herein incorporated by reference). | ||
95
| Exhibit No. | Description | |||
| 10 | .29 | Amended and Restated Management Agreement by and between Care Investment Trust Inc. and CIT Healthcare LLC, dated as of January 15, 2010 (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on January 15, 2010 and herein incorporated by reference). | ||
| 10 | .30 | Form of Performance Share Award Granted to the Company’s Chairman of the Board and Executive Officers dated December 10, 2009 and amended and restated on February 23, 2010. | ||
| 10 | .31 | Purchase and Sale Agreement by and between Care Investment Trust Inc. and Tiptree Financial Partners, L.P., dated as of March 16, 2010 (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on March 16, 2010 and herein incorporated by reference). | ||
| 10 | .32 | Registration Rights Agreement by and between Care Investment Trust Inc. and Tiptree Financial Partners, L.P., dated as of March 16, 2010 (previously filed as Exhibit 10.2 to the Company’s Form 8-K (File No. 001-33549), filed on March 16, 2010 and herein incorporated by reference). | ||
| 21 | .1 | Subsidiaries of the Company. | ||
| 23 | .1 | Consent of Deloitte & Touche, dated as of March 16, 2010. | ||
| 31 | .1 | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 31 | .2 | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .1 | Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .2 | Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
96
Care
Investment Trust Inc. and Subsidiaries
Schedule III — Real Estate and Accumulated Depreciation
December 31, 2009
(Dollars in thousands)
Schedule III — Real Estate and Accumulated Depreciation
December 31, 2009
(Dollars in thousands)
|
Real Estate:
|
||||
|
Balance at December 31, 2008
|
$ | 106,544 | ||
|
Additions/adjustment during the year:
|
||||
|
Land
|
— | |||
|
Buildings and improvements
|
(524 | ) | ||
|
Balance at December 31, 2009
|
$ | 106,020 | ||
|
Accumulated Depreciation:
|
||||
|
Balance at December 31, 2008
|
$ | 1,414 | ||
|
Additions during the year:
|
||||
|
Additions charged to operating expense
|
3,067 | |||
|
Balance at December 31, 2009
|
$ | 4,481 | ||
97
Care
Investment Trust Inc. and Subsidiaries
Schedule IV — Mortgage Loans on Real Estate
December 31, 2009
(Dollars in thousands)
Schedule IV — Mortgage Loans on Real Estate
December 31, 2009
(Dollars in thousands)
| Location |
Carrying
|
Interest
|
Maturity
|
|||||||||||
|
Property Type(a)
|
City | State | Amount | Rate | Date | |||||||||
|
SNF/ALF(b)/(d)
|
Nacogdoches | Texas | 9,338 | L+3.15 | % | 10/02/11 | ||||||||
|
SNF/Sr.Appts/ALF
|
Various | Texas/Louisiana | 14,226 | L+4.30 | % | 02/01/11 | ||||||||
|
SNF(c)/(d)
|
Various | Michigan | 10,178 | L+7.00 | % | 02/19/10 | ||||||||
|
Investment in loans, gross
|
33,742 | |||||||||||||
|
Valuation allowance
|
(8,417 | ) | ||||||||||||
|
Loans at lower of cost or market
|
$ | 25,325 | ||||||||||||
| (a) | SNF refers to skilled nursing facilities; ALF refers to assisted living facilities; ICF refers to intermediate care facility; and Sr. Appts refers to senior living apartments. | |
| (b) | Loan sold to third party in March 2010 totaling $6,069,793. (See Note ) | |
| (c) | Loan repaid by borrower at maturity in February 2010 totaling $9,974,695. (See Note ) | |
| (d) | The mortgages are subject to various interest rate floors ranging from 6.00% to 11.5%. |
|
Balance at December 31, 2008
|
$ | 159,916 | ||
|
Additions:
|
||||
|
New loans and advances on existing loans
|
— | |||
|
Amortization of loan fees
|
247 | |||
|
Deductions:
|
||||
|
Repayments
|
(40,379 | ) | ||
|
Sale of loan to Manager
|
(42,249 | ) | ||
|
Sale of loan to third parties
|
(55,790 | ) | ||
|
Amortization of premium
|
(1,530 | ) | ||
|
Adjustments to lower of cost or market reserve
|
4,046 | |||
|
Gain on sale of loans
|
1,064 | |||
|
Balance at December 31, 2009
|
$ | 25,325 | ||
98
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Care Investment Trust Inc.
| By: |
/s/ Paul
F. Hughes
|
Paul F. Hughes
Chief Financial Officer and Treasurer and
Chief Compliance Officer and Secretary
March 16, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been duly signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
|
Signature
|
Title
|
Date
|
||||
|
/s/ Salvatore
(Torey) V. Riso, Jr.
|
President and Chief Executive Officer (Principal Executive Officer) | March 16, 2010 | ||||
|
/s/ Paul
F. Hughes
|
Chief Financial Officer and Treasurer and Chief Compliance Officer and Secretary (Principal Financial and Accounting Officer) | March 16, 2010 | ||||
|
/s/ Flint
D. Besecker
|
Chairman of the Board of Directors | March 16, 2010 | ||||
|
/s/ Gerald
E. Bisbee, Jr.
|
Director | March 16, 2010 | ||||
|
/s/ Karen
P. Robards
|
Director | March 16, 2010 | ||||
|
/s/ J.
Rainer Twiford
|
Director | March 16, 2010 | ||||
|
/s/ Steve
Warden
|
Director | March 16, 2010 | ||||
99
EXHIBIT INDEX
| Exhibit No. | Description | |||
| 3 | .1 | Amended and Restated Articles of Incorporation of the Registrant (previously filed as Exhibit 3.1 to the Company’s Form 10-Q (File No. 001-33549), filed on August 14, 2007 and herein incorporated by reference. | ||
| 3 | .2 | Amended and Restated Bylaws of the Registrant (previously filed as Exhibit 3.2 to the Company’s Form 10-Q (File No. 001-33549), filed on August 14, 2007 and herein incorporated by reference). | ||
| 4 | .1 | Form of Certificate for Common Stock (previously filed as Exhibit 4.1 to the Company’s Form S-11, as amended (File No. 333-141634), and herein incorporated by reference). | ||
| 10 | .1 | Assignment Agreement, dated as of January 31, 2009 (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on February 5, 2009 and herein incorporated by reference). | ||
| 10 | .2 | Amendment No. 4 to Master Repurchase Agreement, dated as of November 13, 2008 (previously filed as Exhibit 10.5 to the Company’s Form 10-Q (File No. 001-33549), filed on November 14, 2008 and herein incorporated by reference). | ||
| 10 | .3 | Amendment to Management Agreement, dated as of September 30, 2008 (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on October 2, 2008 and herein incorporated by reference). | ||
| 10 | .4 | Warrant to Purchase Common Stock, dated as of September 30, 2008 (previously filed as Exhibit 10.2 to the Company’s Form 8-K (File No. 001-33549), filed on October 2, 2008 and herein incorporated by reference). | ||
| 10 | .5 | Mortgage Purchase Agreement, dated as of September 30, 2008 (previously filed as Exhibit 10.3 to the Company’s Form 8-K (File No. 001-33549), filed on October 2, 2008 and herein incorporated by reference). | ||
| 10 | .6 | Earn Out Agreement, dated as of June 26, 2008 (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on July 2, 2008 and herein incorporated by reference). | ||
| 10 | .7 | Multifamily Note, dated as of June 26, 2008 (previously filed as Exhibit 10.2 to the Company’s Form 8-K (File No. 001-33549), filed on July 2, 2008 and herein incorporated by reference). | ||
| 10 | .8 | Exceptions to Non-Recourse Guaranty, dated as of June 26, 2008 (previously filed as Exhibit 10.3 to the Company’s Form 8-K (File No. 001-33549), filed on July 2, 2008 and herein incorporated by reference). | ||
| 10 | .9 | Master Lease Agreement, dated as of June 26, 2008 (previously filed as Exhibit 10.4 to the Company’s Form 8-K (File No. 001-33549), filed on July 2, 2008 and herein incorporated by reference). | ||
| 10 | .10 | Amendment No. 3 to Master Repurchase Agreement, dated as of June 26, 2008 (previously filed as Exhibit 10.5 to the Company’s Form 8-K (File No. 001-33549), filed on July 2, 2008 and herein incorporated by reference). | ||
| 10 | .11 | Purchase and Sale Contract, dated as of May 14, 2008 (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on May 20, 2008 and herein incorporated by reference). | ||
| 10 | .12 | Performance Share Award Agreement, dated as of May 12, 2008 (previously filed as Exhibit 10.4 to the Company’s Form 10-Q (File No. 001-33549), filed on November 14, 2008 and herein incorporated by reference). | ||
| 10 | .13 | Restricted Stock Unit Agreement Under the 2007 Care Investment Trust Inc. Equity Plan, dated as of April 8, 2008 (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on April 14, 2008 and herein incorporated by reference). | ||
| 10 | .14 | Form of Restricted Stock Unit Agreement Under the 2007 Care Investment Trust Inc. Equity Plan (previously filed as Exhibit 10.2 to the Company’s Form 8-K (File No. 001-33549), filed on April 14, 2008 and herein incorporated by reference). | ||
| 10 | .15 | Contribution and Purchase Agreement, dated as of December 31, 2007 (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on January 4, 2008 and herein incorporated by reference). | ||
100
| Exhibit No. | Description | |||
| 10 | .16 | Master Repurchase Agreement entered into by Care Investment Trust Inc. and two of its subsidiaries, Care QRS 2007 RE Holdings Corp. and Care Mezz QRS 2007 RE Holdings Corp., with Column Financial, Inc. (previously filed as Exhibit 10.1 to the Company’s Form 10-Q (File No. 001-33549), filed on November 14, 2007 and herein incorporated by reference). | ||
| 10 | .17 | Registration Rights Agreement (previously filed as Exhibit 10.1 to the Company’s Form 10-Q (File No. 001-33549), filed on August 14, 2007 and herein incorporated by reference). | ||
| 10 | .18 | Management Agreement (previously filed as Exhibit 10.2 to the Company’s Form 10-Q (File No. 001-33549), filed on August 14, 2007 and herein incorporated by reference). | ||
| 10 | .19 | Care Investment Trust Inc. Equity Plan (previously filed as Exhibit 10.4 to the Company’s Form 10-Q (File No. 001-33549), filed on August 14, 2007 and herein incorporated by reference). | ||
| 10 | .20 | Manager Equity Plan (previously filed as Exhibit 10.5 to the Company’s Form 10-Q (File No. 001-33549), filed on August 14, 2007 and herein incorporated by reference). | ||
| 10 | .21 | Form of Restricted Stock Agreement under Care Investment Trust Inc. Equity Plan (previously filed as Exhibit 10.5 to the Company’s Form S-11, as amended (File No. 333-141634), and herein incorporated by reference). | ||
| 10 | .22 | Form of Restricted Stock Agreement under Care Investment Trust Inc. Equity Plan (previously filed as Exhibit 10.6 to the Company’s Form S-11, as amended (File No. 333-141634), and herein incorporated by reference). | ||
| 10 | .23 | Form of Restricted Stock Agreement under Care Investment Trust Inc. Manager Equity Plan (previously filed as Exhibit 10.8 to the Company’s Form S-11, as amended (File No. 333-141634), and herein incorporated by reference). | ||
| 10 | .24 | Form of Indemnification Agreement entered into by the Registrant’s directors and officers (previously filed as Exhibit 10.9 to the Company’s Form S-11, as amended (File No. 333-141634), and herein incorporated by reference). | ||
| 10 | .25 | Assignment Agreement dated as of January 31, 2009, by and between Care Investment Trust Inc. and CIT Healthcare LLC (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on February 5, 2009 and herein incorporated by reference). | ||
| 10 | .26 | Loan Purchase Agreement with CapitalSource Bank dated September 15, 2009 (previously filed as Exhibit 10.1 to the Company’s Form 10-Q (File No. 001-33549), filed on November 9, 2009 and herein incorporated by reference). | ||
| 10 | .27 | Loan Purchase and Sale Agreement dated as of October 6, 2009, by and between Care Investment Trust Inc. and General Electric Capital Corporation (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on November 18, 2009 and herein incorporated by reference). | ||
| 10 | .28 | Care Investment Trust Inc. Plan of Liquidation (previously filed as Exhibit A to the Company’s Schedule 14A (File No. 001-33549), filed on December 28, 2009 and herein incorporated by reference). | ||
| 10 | .29 | Amended and Restated Management Agreement by and between Care Investment Trust Inc. and CIT Healthcare LLC, dated as of January 15, 2010 (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on January 15, 2010 and herein incorporated by reference). | ||
| 10 | .30 | Form of Performance Share Award Granted to the Company’s Chairman of the Board and Executive Officers dated December 10, 2009 and amended and restated on February 23, 2010. | ||
| 10 | .31 | Purchase and Sale Agreement by and between Care Investment Trust Inc. and Tiptree Financial Partners, L.P., dated as of March 16, 2010 (previously filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-33549), filed on March 16, 2010 and herein incorporated by reference). | ||
| 10 | .32 | Registration Rights Agreement by and between Care Investment Trust Inc. and Tiptree Financial Partners, L.P., dated as of March 16, 2010 (previously filed as Exhibit 10.2 to the Company’s Form 8-K (File No. 001-33549), filed on March 16, 2010 and herein incorporated by reference). | ||
| 21 | .1 | Subsidiaries of the Company. | ||
| 23 | .1 | Consent of Deloitte & Touche, dated as of March 16, 2010. | ||
101
| Exhibit No. | Description | |||
| 31 | .1 | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 31 | .2 | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .1 | Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .2 | Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
102
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsPart IIItem 5. Market For Registrant S Common Equity, Related Shareholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 OrganizationNote 2 Basis Of Presentation and Significant Accounting PoliciesNote 3 Real Estate PropertiesNote 4 Investment in Loans Held At LocomNote 5 Sales Of Investments in Loans Held At LocomNote 6 Investment in Partially-owned EntitiesNote 7 Identified Intangible Assets Leases In-place, NetNote 8 Other AssetsNote 9 Borrowings Under Warehouse Line Of CreditNote 10 Mortgage Notes PayableNote 11 Other LiabilitiesNote 12 Related Party TransactionsNote 13 Fair Value Of Financial InstrumentsNote 14 Stockholders EquityNote 15 Loss Per Share ($ in Thousands, Except Share and Per Share Data)Note 16 Commitments and ContingenciesNote 17 Financial Instruments: Derivatives and HedgingNote 18 Quarterly Financial Information (unaudited)Note 19 Subsequent EventsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationItem For Against AbstainPart IIIItem 10. Directors, Executive Officers and Corporate Governance Of The RegistrantItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules